What is Good in HF?
I’m struggling to define the definition of “good” in the hedge fund world. Some funds aim to just outperform, some want to be uncorrelated to the market, and some want low consistent returns. I’ve written a few scripts myself and done some discretionary trading over the past 5 years, and they perform well and backtest very well. But I am not sure if they would be good in the HF world. Are there certain sharpe, sortino, profit factors that funds aim for? How should I evaluate if the way I manage money would be “good” in money management?
Based on the most helpful WSO content, defining "good" in the hedge fund world can be complex and varies depending on the fund's objectives and strategies. Here are some key points to consider:
Performance Metrics:
Uncorrelated Returns:
Diversification:
Client Relationships:
Market Conditions:
Compliance and Regulation:
To evaluate if your money management approach would be "good" in the hedge fund world, consider the following: - Backtesting and Real Performance: Ensure your strategies perform well not only in backtests but also in real market conditions. - Risk Management: Focus on how well your strategies manage risk and whether they can deliver consistent, risk-adjusted returns. - Diversification: Assess if your strategies can provide uncorrelated returns and add value to a diversified portfolio. - Compliance: Be prepared to meet regulatory and compliance requirements.
In summary, "good" in the hedge fund world is multifaceted, involving consistent performance, risk management, uncorrelated returns, and strong client relationships. Evaluating your strategies against these criteria can help determine their potential success in the hedge fund industry.
Sources: Explain to me like I'm a 12 year old the benefit of a hedge fund, Do you need to be a market genius to start a hedge fund?, Why do people invest in hedge funds?, Random Thoughts on the HF Industry, What should I know before starting a Hedge Fund?
Generally risk adjusted returns is what hedge funds are judged on but each fund has their own mandate so it’s case by case. Sharpe is a pretty good metric and it shouldn’t be hard for you to find out your sharpe
Answer is simple = consistent returns + low volatility. A sharpe ratio above 1.5 or 2.0 would be incredible. HSD to LDD returns coupled with LSD vol.
Plenty of investors and even many MMs would prefer a lower sharpe in exchange for less correlation and/or higher alpha. Not so simple
In the pods, what’s a good sharpe (and if you could share target return on gross, which is all alpha, and the vol they are required to run with)
What’s the typical return threshold for an individual pod (so let’s say a team of a few people managing $1.5-3bn of gross, led by one main PM with a centerbook and maybe a few people under him with sleeves). What’s the range for target return / vol / sharpe for the sleeve books vs the pod in aggregate (sum of sleeves and centerbook)
I don’t fully understand all the math given this isn’t my space, but something about the sleeves being able to run higher vol because the $ pnl from all sleeves is additive, whereas vol/risk is sum of squares?
Would be great to hear some #s for ranges of returns, vol, and sharpe at the sleeve level vs sum of those sleeves/centerbook
Anchor
A good fund follows mandate that satisfies LPs criteria, with additional risk adjusted returns (be that low vol or high alpha). Like any business, the GP is ideally scalable with some barriers to replication by competitors
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