With so many hedge funds in the investment universe, it is significant that investors know what they are looking for in order to make more efficient the due diligence process and make timely and appropriate decisions. Search strategy can be used as performance metrics to determine hedge fund regularity over time and to appraise the guidelines themselves to determine whether the guidelines remain convincing across different economic environments. Lastly, guidelines can help third parties to better support an investor in his or her search process.
Types of Guidelines
When looking for a high-quality hedge fund, it is significant for an investor to define the metrics that are significant to he or she and the outcome required for each. These strategies can be based on absolute values, such as returns that exceed 20% per year over the preceding five years, or they can be comparative, such as the top five highest-performing funds in a particular category.
The first rule an investor should set when selecting a fund is annualised rate of return. Let’s say that we want to find funds with a five-year annualised return that go beyond the return on the Lehman Brothers World Government Bond Index (LBWGBI) by 1%. This filter would get rid of all funds that under perform the index over long time periods, and it could be attuned based on the performance of the index over time.
Absolute performance guidelines
This principle will also disclose funds with much elevated expected returns, such as global macro funds, long-biased long-short funds, and several others. But if these aren’t the kinds of funds the investor is looking for, then he or she must also set up a principle for standard deviation. Once more, we will use the LBWGBI to calculate the standard deviation for the index over the preceding five years. Let’s suppose we add 1% to this results and establishes that value as the principle for standard deviation. Funds with a standard deviation larger than the instruction can also be eliminated from further consideration.
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