Complete Guide To Investment Companies, Funds And REITs

AAA

Hedge Funds - Absolute Returns & The Sharpe Ratio

Absolute Returns
A hedge fund must be evaluated based on absolute returns, but those returns also need to be consistent with the fund's strategy. There are funds that employ strategies that generate very consistent returns over time with limited volatility. An example of this type of fund is an asset-backed lending fund that makes loans and collects payments that are predictable and consistent over time. These funds can generate anywhere from 8 to 12% per year and are often used as a substitute for fixed income, when fixed income is not attractive.

There are other fund strategies that should have similar returns and there are also strategies that should generate higher returns, albeit with much higher volatility. In either case, a hedge fund that describes its strategy as pursuing absolute returns should always have positive returns over 12-month periods, for example. Most hedge funds fall short of these expectations, but in a perfect world, absolute returns should be positive and consistent.


The Sharpe Ratio
One metric that is widely used in the hedge fund world is the Sharpe ratio. The Sharpe ratio measures the amount of return adjusted for each level of risk taken. It is calculated by subtracting the risk-free rate from annualized returns and dividing the result by the standard deviation of the returns. This metric can be applied across hedge funds with different levels of returns and volatility to determine whether the hedge fund is generating any alpha (excess return) by taking on additional risk. A good Sharpe ratio will vary by strategy and anything above 1 tends to be an attractive return. As with other measures, however, the following analysis should be conducted using Sharpe ratio, as well as pure returns metrics.

Related Readings:

Benchmarks


Related Articles
  1. Stock Analysis

    GAMCO Investors: An Activist Investor Analysis (GBL, AC)

    Read about famous investor Mario Gabelli and his activist firm, GAMCO Asset Management, which faced a series of challenges in 2015.
  2. Mutual Funds & ETFs

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  3. Investing Basics

    The Lipper Rating System Explained

    Take a closer look at how Lipper Inc., a subsidiary of Thomson Reuters, determines the ratings for mutual funds in its Lipper Rating System.
  4. Mutual Funds & ETFs

    The 3 Largest Global Ex-U.S. ETFs (VEU, VXUS)

    Discover global ex-U.S. exchange-traded funds and why you may want to use them in your portfolio, and learn about the three largest ETFs available.
  5. Mutual Funds & ETFs

    CDC vs. DLN: Comparing Dividend-Oriented ETFs

    Take a look at an overview and comparison of two dividend-oriented ETFs to learn the respective advantages and disadvantages of each fund.
  6. Mutual Funds & ETFs

    JJE vs. UBN: Comparing Energy ETFs

    Take a look at an overview, comparison and evaluation of two lesser-known commodity ETFs that offer exposure to the energy sector.
  7. Mutual Funds & ETFs

    The 3 Best Smart Beta ETFs for 2016 (PRF, FNDX)

    Compare ETF performance histories when investing in smart beta ETFs for improved value investing strategy and weighting by financial accounting metrics.
  8. Mutual Funds & ETFs

    ETF Case Study: Do Utilities ETFs Protect in Down Markets? (XLU, VPU)

    Explore the historical performance of large utilities ETFs relative to market indexes during bear markets to find out if utilities ETFs provide downside protection.
  9. Mutual Funds & ETFs

    3 Expensive Mid-Cap Mutual Funds Worth Your While (ETAGX, VMACX)

    Discover three mutual funds with above-average expense ratios and consistent outperformance of the S&P 500 Index and the Russell Mid-Cap Index.
  10. Mutual Funds & ETFs

    JANBX: Overview of Janus Balanced Fund

    Discover a balanced mutual fund with a solid performance history, weathering down markets and routinely outperforming equity indexes in up markets.
RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Exchange-Traded Commodity (ETC)

    What an exchange-traded commodity (ETC) is, and how it works. ...
  3. Socially Responsible Investment ...

    Socially responsible investing looks for investments that are ...
  4. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  5. Alternative Energy ETF

    An exchange-traded fund that invests in companies engaged in ...
  6. PIPE Deal

    Signifying "Private Investment in Public Equity," a PIPE deal ...
RELATED FAQS
  1. Is a money market account the same as a money market fund?

    Discover the differences between money market accounts and money market funds, including minimum balance requirements, withdrawal ... Read Answer >>
  2. What typically comprises a money market fund?

    Learn about the basic types of money market funds and discover how they are characterized by the types of investments that ... Read Answer >>
  3. What are common advantages of investing in large cap stocks?

    Learn what large-cap stocks are and how investors can benefit from common advantages of adding large-cap stocks to their ... Read Answer >>
  4. What is the difference between a REIT and a master limited partnership

    While both are prized for their dividends by income investors, there are notable differences between REITs and master limited ... Read Answer >>
  5. What is the difference between exchange traded funds (ETFs) and closed end funds?

    Understand the difference between exchange-traded funds and closed-end funds, and learn how investors can use each to meet ... Read Answer >>
  6. What do real estate investors look for in a property?

    Profit from real estate investments by either flipping homes or becoming a landlord. Learn best practices for a successful ... Read Answer >>

You May Also Like

Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center