Understanding Hedge Fund Performance Metrics

Key Metrics Calculated:

• Total Cumulative Return: The total percentage gain or loss of the investment over the entire period analyzed. Calculated as ((1+R1)*(1+R2)*...*(1+Rn)) - 1.
• Annualized Return (CAGR): The geometric average annual rate of return over the period. It shows the constant annual rate at which the investment would have grown to its final value. Calculated as (1 + Total Return)^(1 / Number of Years) - 1.
• Annualized Volatility (Standard Deviation): A measure of the dispersion of an investment's returns around its average return, scaled to an annual figure. Higher volatility generally indicates higher risk. Calculated as Periodic Standard Deviation * sqrt(Periods per Year).
• Sharpe Ratio (Annualized): Measures risk-adjusted return. It is the average return earned in excess of the risk-free rate per unit of total volatility (standard deviation). A higher Sharpe Ratio is generally better. Formula: (Annualized Return - Annualized Avg. Risk-Free Rate) / Annualized Volatility.
• Sortino Ratio (Annualized): Similar to the Sharpe Ratio, but it only considers downside volatility (standard deviation of negative returns or returns below a Minimum Acceptable Return - MAR). It differentiates between harmful (downside) and overall volatility. A higher Sortino Ratio is generally preferred by investors who are more concerned with downside risk. Formula: (Annualized Return - MAR_annualized) / Annualized Downside Deviation.
• Maximum Drawdown (MDD): The largest peak-to-trough percentage decline experienced by the investment during the analyzed period. It quantifies the worst-case loss from a previous high point.
• Outperformance vs. Benchmark: A simple measure calculated as Fund Annualized Return - Benchmark Annualized Return. Positive values indicate the fund outperformed the benchmark on an annualized basis. This is not "Alpha" which requires regression analysis.

Interpreting the Metrics:

• Higher Returns & Sharpe/Sortino Ratios are generally desirable, indicating better performance or risk-adjusted performance.
• Lower Volatility & Maximum Drawdown are generally preferred, indicating lower risk.
• Context is Crucial: These metrics should be compared against relevant benchmarks, peers, and the fund's own stated objectives and risk profile.
• Appropriate Benchmark: The chosen benchmark should closely reflect the fund's investment strategy and universe for a meaningful comparison.
• Time Period: Performance metrics can vary significantly depending on the time period analyzed. Longer periods generally provide more reliable insights.

Limitations:

• Historical Data: All these metrics are based on past performance, which is not a guarantee of future results.
• Data Quality: The accuracy of the analysis depends entirely on the accuracy and consistency of the input data. Hedge fund return data can sometimes be subject to biases (e.g., survivorship bias, self-reporting bias).
• Simplified Calculations: This tool provides standard calculations. True alpha and beta require regression analysis, which is not performed here. The Sortino ratio's downside deviation calculation is one common approach.
• No Consideration of Fees: Unless the input fund returns are already net of fees, these metrics will reflect gross performance. Hedge fund fees can be substantial and significantly impact investor returns.
• Strategy Dependent: Different hedge fund strategies have inherently different risk/return profiles and appropriate benchmarks.

Conclusion: This analyzer provides a quantitative overview of a fund's historical performance based on the data you provide. It should be used as one component of a broader due diligence process, which includes qualitative assessment of the fund manager, strategy, risk controls, and operational aspects.