Reading 43: Evaluating Portfolio Performance－LOS j

Value added return is the excess return on a long short portfolio where the weights sum to zero. Construct a separate long and short benchmark, which can then be combined together in their relevant proportions. The Sharpe ratio compares the return to risk free rather than a benchmark. Relative performance using traditional benchmarks is the least appropriate given hedge funds concentration on absolute returns and the lack of reliable traditional benchmarks.

The portfolio return is not restated to compensate for weighting differences. To replicate a zero net asset hedge fund the weights must add to zero, not 1.0. Calculation of return is achieved by summing the individual long and short positions.