How to ANALYSE Hedge Funds' Performance | Sharpe, Sortino, Treynor Ratios Explained

#sharperatio #sortinoratio #treynorratio
In this video we will learn how to calculate the most used metrics to analyse hedge funds' performance and make informed investment decisions.
The metrics which are most used by analysts are: Sharpe ratio, Sortino ratio, Treynor ratio and Information Ratio.
Sharpe, Sortino and Treynor ratio all have the same numerator, i.e. the average excess return of the fund compared to the risk-free rate (approximated, as usual, by short term yields on government bonds), but these ratios have different denominators.
The Sharpe ratio compares the excess return of the fund to its total risk, as measured by the standard deviation. The Sortino ratio uses Downside deviation which is the standard deviation of negative returns only. The Treynor ratio compares the excess return to the fund's market risk as measured by the Beta of the fund.
The Information ratio compares the average return of the fund to a discretionary benchmark. This benchmark can be a passive index that the manager is trying to outperform, or it can be the average of the fund's competitors. This excess return is divided by the tracking error, which technically measures the standard deviation of the difference in returns between the fund and its benchmark. The tracking error gives us a measure of active risk run by the manager as it tells us how far from its competition the fund is positioning over time.
Analysts tend to use the Sharpe ratio if they believe that standard deviation is an appropriate measure of risk, this will be situations where we have both systematic (market) risk and idiosyncratic (asset specific) risk. If systematic risk has been diversifier away, the Treynor ratio might be a more appropriate measure of excess return per unit of risk since it only uses the Beta which measures market risk.
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[@Juoa794]

Excellent explanation! Explains pros and cons and under which conditions each is useful. Thanks for putting the time to share this.

[@divyakuppili]

I am so lucky to have come across your channel. I am working on an ESG-related project for one of my MBA courses. Your video truly is a blessing. Thank you so much, appreciate your efforts.

[@Hagami_]

I'm just happy to find someone who calculated the semi-variance correctly :D I thought I was going crazy for a bit. Thanks for showing the scale of the different ratios compared to eachother :)

[@jamesgood781]

Thank for the video! Not only smart but also very enjoyable to watch.

[@lucatintor4896]

Good work, it is a very reliable video for beginners.

[@ShivInvestments]

Great video and explanations, thank you!

[@brunotedeschi3197]

I'm doing a study review for my CAIA exam next tuesday and loved your content! Clear, concise and well explained. Cheers

[@hws2152]

Information in this video is extremely informative specifically for upcoming CWM exam of ICSI

[@bhaskardebnath6401]

Very well explained 👍👍

[@manu85345]

Great!

[@arpsami7797]

There are bunch of investment channels in KZbin, but for someone like me who just start her/his career in as analysts, your channel is the best.

[@BrainyFinance]

That's so nice to hear, thank you for leaving me a comment 😊

[@RBEN1402]

Hi you are very strong in financial services

[@JDWilliamsPD]

Bravo!

[@yadavrj2694]

Very good

[@bazejmakowski9249]

Love it!

[@pavankulkarni9813]

Clear and concise. great video! I was wondering if you could make a video explaining systematic factors when analysing hedge funds. Also curious to know your approach to comparing emerging managers versus established funds with longer track record

[@sgn4525]

Great explanation thank you.

[@BrainyFinance]

So happy you found it useful, thank you for watching!

[@hlang08]

This is the best summary I've found. Are there any standard ways to calculate these ratios? For example are monthly returns usually use, as opposed to daily or yearly? And if monthly, would you multiply by sqrt(12) to annualize it?

[@imperatoreTomas]

Thank you for these

[@BrainyFinance]

Glad you like them!

[@smitshah415]

You understood this concept very sharply. Thank you for making indepth video with comparison. Can you make video on strategy which hedge fund manager use for investment purposes with hedging?

[@BrainyFinance]

Hi Smit, thanks for watching and for leaving me your feedback! I did videos on Merger Arbitrage (kzbin.info/www/bejne/poLIe5qld7GZiqc) and Long/Short (kzbin.info/www/bejne/fJqqdXygestsfa8) Will definitely do more :)

[@smitshah415]

@@BrainyFinance Thanks.

[@kaustubhkalbhor5842]

I'm building a model that considers scores from major financial ratios & multiples, and the esg factors. Thinking of weighting my large cap portfolio based on these and the Sharpe ratio. Do you think it would be right to assume that big firms having a nice esg score could be better compared by Treynor ratio than Sharpe, since unsystematic risk would be lesser with them?

[@faxmebeer33]

Omg, I knew I'd eventually get a finance kink. Today is the day.

[@huongyi]

Thanks for this clear and concise video. May I ask how do you get the Standard Deviation value? Is there a method of calculating it? Or we can refer to them online such as Yahoo Finance? Thanks in advance

[@TryAgainBorryS]

What are the sources from which you can extract hedge fund data (such as their portfolio beta and other values, which can be used in the Fama French 3-factor model)?

[@mrmoh2]

Hello, for Sharpe and Sortino or even Calmar, do you use historical average return and volatility of the portfolio or do you annualize returns and volatility to calculate these ratios?

[@supritinanda8732]

Hi, thank You for your video, very clear. I really appreciated. Just one question about the sharpe Ratio, shouldn't the excess return of portfolio be divided by the "standard deviation of excess returns" ?

[@kaustubhkalbhor5842]

Hello Supriti! The Sharpe ratio is always divided by the SD of the stock from it's mean avg value. This is because, we want to compare how much returns will the stock generate vs the risk (or in other words up & down movement) of the stock

[@guitarhero3616]

wow

[@nogueiradario]

There is some book where i can study this ?

[@vasudevanvijayan3428]

Hi..Thanks for the wonderful explanation.. I have one query. Is it possible to calculate Sharpe ratio for a day trading strategy daily returns? If so please put an video about that.. Thanks in advance..Not but the least, "Beauty with brains a deadliest combination in the world".. Cheers..

[@BrainyFinance]

Thank you for your comment! It's definitely possible: if you have multiple trade per day you can take the average daily return and compare to the average standard deviation (I would ignore the risk-free rate in that case because it would be a very small number anyway) Hope this helps! :)

[@carlosduran9141]

Hello "Brainy," I found your video very insightful. I'm an S&P 500 Emini Day trader, typically executing an average of seven trades per session. I'm interested in analyzing my performance in a manner that hedge funds would find compelling, as I'm considering offering my services to them. Could you advise me on the appropriate formulas or metrics to apply in this scenario? Thank you!

[@rwiegs]

And what about Ralph Vince's fav measurement of performance: profit factor (PF)? Sortino comes closest to PF. What I like about PF is that it's universal.

[@investyai]

May I ask anyone could give me the calculation of Portfolio Sortino of many portfolios in average. Should we use weighted?

[@brunotedeschi3197]

If you're talking about measuring the Sortino rateio of a portfolio, do It of the whole thing, in a consolidated way. If you're are talking about about merging different Sortino ratios from different portfolios, you should consider the correlation between the portfolios. So simply averadging should create a wrong measurement.

[@hollywoodshortscreen9958]

Hello madam i am great fan of yours i want to learn trading. Coild you please teach me all about trading? I am ready to move anywhere in the world to learn this from you.

[@BrainyFinance]

Thank you for your support, it means a lot to me! I am not a trader unfortunately, I believe is very difficult and time consuming to profit from short term market movements. I do love investing though and I plan to create more and more content around this topic as I believe that basic financial knowledge should be free for everyone! Hope you have a lovely evening :)

[@hollywoodshortscreen9958]

@@BrainyFinance thanks dear i have few doubts about a stock. How can we ask you do you have a discussion forum or telegram channel or do you use whatsapp?

[@BrainyFinance]

Hi there, you can write us here: [e-mail] Thank you and have a great weekend :)

[@hollywoodshortscreen9958]

@@BrainyFinance thanks have a great weekend too👍🏻

[@randomdude7384]

The most important (and perhaps the only one that truly matters) ratio/indicator is to compare the hedge fund you're interested in to the S&P 500, if investing were a horse race, then all the horses (aka the hedge funds) would have to compete to the ultimate champion horse (the S&P 500). And at the end of the race, you'd have to subtract all the management fees as well. That's why all the hedge-funds underperform the S&P 500, in the long run, one would be better off putting the bulk of one's money into the Vanguard or some other ETF that tracks the S&5 500.

[@BrainyFinance]

Hear hear, thank you for your comment :)

[@jamesstmanhattan]

@@BrainyFinance He's hit the nail right on the head, quite frankly. Even Aswath Damodaran has said the exact same thing many times over. With the rampant democratization of the investment industry, more and more people will start waking up to this truth. It's over for the hedge funds.

[@BrainyFinance]

Thank you for your comment! They definitely have not lived up to investors' expectations. It wasn't so much the low performance over time but the lack of uncorrelation when things got ugly in the wider markets (see Q4 2018 or Q1 2020 more recently)

[@randomdude7384]

@@BrainyFinance Economically hedge funds still make sense for PE firms and certain financial institutions such as investment banks. You can deploy a hedge fund as a tool in a certain framework and a means of diversification. Or for executing specific strategies within a certain framework. However, they make next to zero sense for investing the capital of high net-worth individuals, even if you were a billionaire, it'd make all the sense under the sun for you to seek advice from Vanguard or Blackrock on how to structure your portfolios and make it supremely diversified, and they'd do it for free. The PE industry is pretty much where all the institutional dry powder is being deployed now. And even in terms of common sense and prudence, a hedge fund can go belly up overnight (and they do all the time), whereas a PE run by capable people and executing sound financial strategies, investing sensibly and prudently can never go bust overnight.

[@johnfoo5402]

Not all hedge funds aim for outperformance… some aim for market neutrality.

[@GasperSopi]

"Dividing by zero is a huge waste of time" 😂😂😂

[@BrainyFinance]

I'm done wasting time with impossible tasks 😆

[@MrPinyworld]

It would have been better if you used some real-life examples with calculations

[@Nimitz_oceo]

What are you a physicist? I will the brain is has beautiful as the face

[@BrainyFinance]

As beautiful as this comment? Thank you so much!

[@BRecuyer]

[@Robis9267]

Great video and explanations, thank you!

[@BrainyFinance]

That's so good to hear! It really motivates me to know that the content I put out there is helpful ^.^