Which way is up? - measuring performance

In the second in a series on hedge fund performance measurements, Edhec's Walter Gehin sets out to discover the ins and outs of putting a number and meaning to the all-important direction of that red track-record line

The basis of a quantitative fund selection process consists of adequate absolute performance indicators. In a hedge fund context, risk adjustment plays a primordial role because of the specificities of return distributions.

An initial step involves calculating a "raw" return, where contributions, withdrawals, interest, dividends accrued, gains/losses, accrued management fees and transactional fees are taken into account. For example, the Hedgeworks method is as follows:

where b is the basis

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