The performance metrics used for hedge funds

To determine how well hedge fund strategies are bringing in profits or how well hedge fund managers are doing, there are performance measures or benchmarks, such as the following:

Absolute return index

Most hedge funds are assessed depending on their absolute return, or total return, which is the total profit or loss an asset achieves over a particular period. When using the absolute return index, the performance of the investment vehicle does not have to be compared with others. However, it is important to check if the result is consistent with the fund’s strategy.

Sharpe ratio

Widely used in the field of hedge funds, the Sharpe ratio illustrates the relationship between the returns and the risks of the strategy. It is computed by subtracting the risk-free rate from annualized returns and then dividing the difference by the standard deviation of the results. If the Sharpe ratio has a value greater than one, the strategy is considered attractive.

Sortino ratio

This metric is similar to the Sharpe ratio in that the return of a strategy is compared with the risk. It differs, however, in that the Sortino ratio uses the downside deviation instead of the standard deviation of the results as divisor or denominator in the formula. The downside deviation is the asset’s standard deviation of negative asset returns.

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