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?"
Downside Capture, Drawdown And Leverage

Managing Wealth
Standard Deviation
Learn about how standard deviation is applied to the annual rate of return of an investment to measure the its volatility. 
Investing
Why Standard Deviation Should Matter to Investors
Think of standard deviation as a thermometer for risk, or better yet, anxiety. 
Investing
Quantitative Analysis Of Hedge Funds
Hedge fund analysis requires more than just the metrics used to analyze mutual funds. 
Trading
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". 
Investing
Explaining the Empirical Rule
The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution. 
Investing
PRHSX: Risk Statistics of Health Sciences Mutual Fund
Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk. 
Trading
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. 
Trading
Improve Your Investing With Excel
Excel is a useful tool to assist with investment organization and evaluation. Find out how to use it. 
Investing
A Simplified Approach To Calculating Volatility
Though most investors use standard deviation to determine volatility, there's an easier and more accurate way of doing it. 
Investing
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth.