Hedge fund performance measurement
Hi, I’m a CPA working for an asset management firm in London and spend a lot of time working on fund of funds NAV calculations etc, but am seeing an increase in requests for calculations around fund performance, the usual QTD, YTD & IT’D, any recommendations on how to calculate these? Arithmetic versus geometric measurements and also hedged and unhedged performance measurement tips guidance much appreciated.
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I presume you mean something more elaborate, but if you’re using Excel, there are a number of ways to get these calculations. I find the easiest to be the =average and =geomean functions which are duplicating the algebra of (x1+x2+…xi) / i and (([1+x1]*[1+x2]*…[1+xi])^(1/i))-1. If you use =count, you can duplicate the algebra without the =average and =geomean functions; using =sum and =product, etc. For multiple portfolios of the same positions, you could build a price/return table and use various lookup functions.
Somewhat differently, I have been wondering about leverage calculations for a while, and despite having asked many people and consulted quite a few books, I’ve yet to get a satisfactory answer. Consider something like sector allocations for the following investments:
$25,000 of 1,000 shares of MSFT @ $25
$5,000 of 1,000 Calls SYY $25 Jan 2014 @ $5
-$1,000 of 1,000 Puts MDT $30 Jul 2012 @ $1
$21,000 Cash
NAV: $50,000
They’re all long investments, so despite the fact that the put is a “short”, it seems misleading to suggest the sector allocation for Healthcare is -2%. Similarly, saying the sector allocation for Services is 10% seems very misleading. One could apply a variety of conversions, such as treating the puts as a cash covered put (which would require adding $29,000 in debt) and/or treating the calls as $25 of equity with $20 of loans (assuming the dividends cover the interest, for simplicity). In that case, the sector allocations might look like:
$25 MSFT
$30 SYY
$30 MDT
$21 Cash
$54 Debt
And summing up just the investments as 30% MSFT, 35% SYY, 35% MDT; etc.
I have yet to find a clear industry standard for handling leverage. Again, one might look at this portfolio and fairly describe it as leveraged 28% leverage (Net Debt / $118 Gross Positions); etc. Obviously, the process gets more complicated with spreads and other more elaborate positions.
I admit to not well understanding VAR. To date, it seems impractical to me, representing more of a short-term stress test than a long-term descriptor. I reviewed some of the GIPS documents but haven’t found anything useful yet (Global Investment Performance Standards).
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You need to look at the delta of the two options to add back to the cash and (1-Delta) MSFT position. That will get your current exposure to divide by your capital to obtain your leverage.
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I’m missing something still. Can you provide and example, or reference to a book, link, etc. Assume the Deltas are both 75%, for sake of discussion; then…?
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