Quote:
Originally Posted by discostu940
I saw you using sharpe ratio's as a way to measure performance of Millennium earlier in this thread.
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1. Is a sharpe ratio the best way to measure performance by a Hedge fund in your opinion(As with many people, I don't agree that volatility = risk, especially when valuing equities)??
2. What is the best way to gauge risk-adjusted performance of your own fund, and do you publish these figures??
3a. Do you think there are better metrics/ratios out there to measure how much true alpha a hedge fund is delivering??
3b. Do you believe that a hedge fund can create a pricing structure where they only get paid on the excess alpha(defined by your answer to 3b) generated??
On vol vs risk see point 1 on this:
http://www.cfapubs.org/doi/pdf/10.2469/faj.v70.n1.2
Sharpe is not perfect (no one measure is) but if I could know only one thing, I think that would be it.
When it comes to fees, I want to make the following point. You should measure/discuss fees per unit of "alpha effort".
If you invest in an index fund it may charge 10bp, but does not seek to find alpha. That does not make it bad (in fact, for most small individual investors this is not a bad choice at all).
You can invest in a long only alpha seeking manager that may charge 50bp (or more) and 90% of their risk is beta (which you could have got for 10bp in an index fund) and 10% of their risk is actual stock selection alpha. Per unit of "alpha effort" they are charging 4% fees the way I see it.
If a hedge fund runs a portfolio that is beta neutral (hedged), and say it uses one turn of leverage, you could say it is delivering 200% alpha effort on a 2 and 20 fee structure. Just for math sake, say the manager earns a 17% gross return (not bad), they would earn 5% fees for 200% alpha effort, or 2.5% per unit...measured this way the fees are actually lower.
You could invest in a mix of index funds and hedge fund managers to replicate the same mix of alpha and beta as a long only manager at a lower cost!
When hedge fund managers replace alpha with beta, they are (in my way of seeing things) increasing their fees.
Last edited by hedgefundguy; 09-19-2014 at 08:52 AM.