Hedge fund performance measurement

(Last Updated On: December 29, 2011)
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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.


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).


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.


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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