High-Powered Investing All-in-One For Dummies, 2nd Edition

Chapter 4

Evaluating Hedge Fund Performance

In This Chapter

Assessing risk and return within a hedge fund

Bringing benchmarks to bear on performance evaluation

Realizing the reality of hedge fund returns

Finding a firm that tracks hedge fund returns

Calculating investment performance seems easy: You take your balance at the end of the year, divide it by your balance at the start of the year, subtract 1, and voilà! But what if you add to your investment in the middle of the year in order to net a bigger return? What if your hedge fund manager had to cash out other shareholders? Quickly, you're left with algebra unlike any you've seen since high school. Because of all the possible complications, many researchers in the investment industry are trying to standardize calculations, and others are asking pointed questions to make solid comparisons.

This chapter looks at how a hedge fund measures and evaluates its performance, as well as what questions you need to ask your prospective fund partners about performance calculation. Evaluating a hedge fund's performance helps you determine ...