Hedge Funds  Standard Deviation & Value At Risk
Standard Deviation
The most common risk measure used in both hedge fund and mutual fund evaluations is standard deviation. Standard deviation in this case is the level of volatility of returns measured in percentage terms, and usually provided on an annual basis. Standard deviation gives a good indication of the variability of annual returns and makes it easy to compare to other funds when combined with annual return data. For example, if comparing two funds with identical annualized returns, the fund with a lower standard deviation would normally be more attractive, if all else is equal.
Unfortunately, and particularly when related to hedge funds, standard deviation does not capture the total risk picture of returns. This is because most hedge funds do not have normally distributed returns and standard deviation assumes a bellshaped distribution, which assumes the same probability of returns being above the mean as below the mean.
Figure 2: Standard Deviation Chart 
Most hedge fund returns are skewed in one direction or another and the distribution is not as symmetrical. For this reason, there are a number of additional metrics to use when evaluating hedge funds and, even with the additional metrics, some risks simply cannot be measured.
Another measure that provides an additional dimension of risk is called valueatrisk (VaR). VaR measures the dollarloss expectation that can occur with a 5% probability. In Figure 2, this is the area to the left of the vertical black line on the left of the graph. This provides additional insight into the historical returns of a hedge fund, because it captures the tail end of the returns to the down side. It adds another dimension because it makes it possible to compare two funds with different average returns and standard deviation. For example, if Fund A has an average return of 12% and a standard deviation of 6%, and Fund B has an average return of 24% with a standard deviation of 12%, VaR would indicate the dollar amount of loss that is possible with each fund with a 5% probability.
Put another way, VaR would tell you with 95% confidence that your losses would not exceed a certain point. (You can never be 100% confident that you won't lose an entire investment.) It tries to answer the question "Given an investment of a particular return and volatility, what's the worst that could happen?"

Markets
The Uses And Limits Of Volatility
Check out how the assumptions of theoretical risk models compare to actual market performance. 
Fundamental Analysis
Quantitative Analysis Of Hedge Funds
Hedge fund analysis requires more than just the metrics used to analyze mutual funds. 
Active Trading Fundamentals
How To Convert Value At Risk To Different Time Periods
Volatility is not the only way to measure risk. Learn about the "new science of risk management". 
Fundamental Analysis
Explaining the Empirical Rule
The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution. 
Mutual Funds & ETFs
Understanding Volatility Measurements
How do you choose a fund with an optimal riskreward combination? We teach you about standard deviation, beta and more! 
Forex Education
Trading With Gaussian Models Of Statistics
The entire study of statistics originated from Gauss and allowed us to understand markets, prices and probabilities, among other applications. 
Bonds & Fixed Income
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth. 
Forex Education
Improve Your Investing With Excel
Excel is a useful tool to assist with investment organization and evaluation. Find out how to use it. 
Fundamental Analysis
Calculating Tracking Error
Tracking error is the difference between the return on a portfolio or fund, and the benchmark it is expected to mirror (or track). 
Investing Basics
A Simplified Approach To Calculating Volatility
Volatility is sometimes greater than anticipated, but the way it’s measured can compound the problems that occur when it’s unexpected.

Residual Standard Deviation
A statistical term used to describe the standard deviation of ... 
Empirical Rule
A statistical rule stating that for a normal distribution, almost ... 
Downside Deviation
A measure of downside risk that focuses on returns that fall ... 
Tail Risk
A form of portfolio risk that arises when the possibility that ... 
Standard Error
The standard deviation of the sampling distribution of a statistic. ... 
Appraisal Ratio
A ratio used to measure the quality of a fund's investment picking ...

How is standard deviation used to determine risk?
Understand the basics of calculation and interpretation of standard deviation and how it is used to measure risk in the investment ... Read Answer >> 
How is risk aversion measured in Modern Portfolio Theory (MPT)?
Find out how risk aversion is measured in modern portfolio theory (MPT), how it is reflected in the market and how MPT treats ... Read Answer >> 
What is the difference between standard deviation and mean?
Understand the basics of calculating and interpreting mean and standard deviation and how these mathematical fundamentals ... Read Answer >> 
What are some common measures of risk used in risk management?
Learn about common risk measures used in risk management and how to use common risk management techniques to assess the risk ... Read Answer >> 
What metrics should I use to evaluate the risk return tradeoff for a mutual fund?
Understand the key metrics used to analyze mutual funds and how investors can use each measurement to determine the riskreward ... Read Answer >> 
How can you calculate volatility in Excel?
Understand how to calculate historical volatility using Microsoft Excel from closing price raw data, including why this metric ... Read Answer >>