New Measures of Hedge Fund Performance – Fund High Water Mark Sustainability

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A paper released by HEC Montreal Department of Finance professors analyzes the pure persistence of fund strategies and reviews the ability of different strategies to continually reach high water marks.  With more than 10,000 hedge funds globally (more hedge funds than Starbucks), investors should question the ability of strategies to continually perform.  With more than 80% of funds under their high water marks in 2008, investors need to consider (a) their fund strategies’ ability to return to their high water mark and (b) the strategies average time to return to that figure.  Using Markov analysis, the professors were able to derive average time for different strategy categories to return to prior highs and likelihood that those highs would be met.  You can download the paper and derivations here, http://bit.ly/ctEqW1

A discussion of the analysis in more layman’s terms occurs here, http://bit.ly/95KSXW

Conclusions are:

• It is more challenging to increase high water marks than to generate positive returns, because typical negative returns are greater in magnitude than typical positive returns.
• The bigger the difference between probability of positive return and probability of increasing high water mark (see the first chart below), the greater the time to recover from losses. Across strategy classes, the average time to recover a capital loss ranges from 2.49 months to 7.15 months.
• Strategy classes with greater persistence in reaching new high water marks (see the second chart below) tend to recover from losses more quickly.

********  IvyPlus June 15th Fund Business Development Event – http://bit.ly/aToA1J *******

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