Choosing a hegde fund to invest

Discussion in 'Professional Trading' started by APX81, Feb 15, 2006.

  1. APX81


    Hi, I was given a task to make a statistical method for choosing the best hedge funds of all. And I think I need a little bit help or rather consultation on this. I'm not expecting anyone to do my work for me - I'm just wondering about the opinions.

    So what is the most important ingredient you look for before you would make an investment in a hedge fund?(fund returns,strategies, the length of the fund track record...) Or how you would classify those by importance?

    Also if anyone know any site that could help me in this, please post a link.

    I will be thankful for every opinion...
  2. Start from the beginning. What is your investment objective?
  3. If this task were given to me I would use the sharpe ratio. It provides the "risk adjusted return," two funds with the exact same strategy but different levels of risk will have the same sharpe ratio even though one could have much higher returns.

    Definitely factor in length of track record, someone that achieves a sharpe of 3 over 15 years is much more likely to continue that than someone that has been doing it for 6 months. Also look at recent performance, if the manager has a 15 year track record a good sharpe ratio but made 100%+ returns his first five years and is making under 10%+ the last 5 yrs something is up. Check the sharpes, if they are the same, he reduced leverage if it is currently much lower than it used to be he is on a downward slide.

    Not all hedgefunds are the same, you should probably determine what catagory of funds you plan to look at. A "mean reverting" fund is going to make very steady returns and thus have a very high sharpe but that masks the catosrophic risk they take, like LTCM.

    A managed futures fund is likely to have a much lower sharpe than the fund mentioned above, but will probably give you a better idea of the risks involved. Managed futures is one of the most volatile HF sectors, but can provide unbeleivable returns and I think will actually provide more consistent returns for investors with longer-term time frames. (3-5 years)

    Good Luck

  4. No single performance measure, or even a few, will get the job done. The Sharpe Ratio, in particular, is seriously (some would argue -- fatally) flawed, despite its popularity. You need to think holistically, employing both quantitative and qualitative approaches.

    Read, assimilate and apply what's in this book (Jack Schwager, Managed Trading: Myths and Truths) and your boss / audience will think (for better or for worse...) that you are an underpaid genius. Click on "Search inside this book" link below the image to see the table of contents, etc.