Gauging performance
Hedge fund performance measures must incorporate risk to be useful for investors. But not all performance measures are created equal, argues Barry Schachter
If it is accepted that the expected return is the reward for taking risk, then it immediately follows that risk measurement and performance measurement are inseparable concepts. However, they are often not treated that way, and therein lies a host of problems.
While the financial media is fond of ranking hedge funds by year-to-date returns, most would agree this is not useful as it does not consider risk. For ranking by returns alone to be useful, investors must be risk neutral. A risk-neutral
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