All you need to know about investing short and simple
© Leonardo Timis
CHAPTER 7
PERFORMANCE MEASUREMENT
7.1 Introduction
Assessing the performance of a hedge fund (or a generic investment) only on the average return is deceptive because the underlying risk is not being considered.
For this reason, the best way to understand the real ability of a manager (or the performance of a generic investment) lies behind the adjustment of these average returns to representative risk measures.
As follows, we will define the most used performance measures. From the start, it is noticeable that the list is long; consequently, using different performance measures on the same sample of funds (or generic investments) leads to different rankings.
Thus, the real question is, which one is the best measure? The answer is not unique for anyone who wants to invest her/his wealth, but it depends on their own expectations and what someone is looking for. Once you understand your investing needs, choosing the best fitting performance measure will be easy.
7.2 Sharpe ratio
7.3 M2
7.4 Treynor ratio
7.5 Sortino ratio
7.6 Information ratio
7.7 Sterling ratio
7.8 Burke ratio
7.9 Return on Var
7.10 Jensen's Alpha
For those, like me, that like keeping the physical copy of a book on their bookshelves, you can buy the original copy of this book on Amazon store for $34.
For those more addicted to Kindle, you can buy a copy of this book on Kindle store for $24.