Session 18: Alternative Investments Reading 74: Alternative Investments
LOS l: Discuss the performance of hedge funds, the biases present in hedge fund performance measurement, and explain the effect of survivorship bias on the reported return and risk measures for a hedge fund database.
Hedge funds are generally not required to publicly disclose their performance, however, some managers choose to make performance information available to the public. This information is then included in hedge fund indexes and some conclusions about the performance of hedge funds can be drawn. Which of the following statements regarding hedge fund performance is least accurate?
A) |
When measured by standard deviation, hedge funds are less risky than traditional equity investments. | |
B) |
In recent years, the Sharpe ratio for hedge funds has been comparable to that of fixed income investments. | |
C) |
The reported volatility of hedge fund returns may be higher than the actual volatility of returns. | |
Many assets that are included in a hedge fund portfolio are not actively traded. Managers utilize estimates to report the market value and performance of their hedge funds. Using estimates rather than actual market transactions may result in smoothed pricing, thereby reducing reported volatility. Both remaining statements are true.
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