Alpha and beta [130 months]
Similarly to mutual funds, hedge funds should be evaluated for both absolute an relative returns. An
experienced investor usually has an intimate knowledge of stock
markets. Therefore, the comparison of Iris Investment
performance with a market as a whole might give a valuable
information to an investor how to compose his investment
portfolio and when to invest or disinvest from Iris. To this aim,
we propose to look at alpha/beta
parameters and their histograms.
The net return of the fund relative to the volatility adjusted return of the benchmark index is a fund's alpha. A positive alpha of 1.0 means the fund on the risk-adjusted basis has outperformed its benchmark index by 1%. Similarly, a negative alpha of -1.0 indicates an underperformance of 1%. The funds tracking benchmarks have, by the definition, alpha = 0. Every fund manager hunts for a positive alpha .
is a measure of the volatility, or systematic risk of a portfolio in
comparison to the benchmark index representing the market as a whole.
A beta of less than 1.0 means that the portfolio will be less volatile than the market while beta greater than 1.0 indicates the opposite. For example, if the funds beta is 0.55 its portfolio is subject to the theoretical price swings of only 55% of these observed by the markets.
Our choice for a global benchmark is S&P 500.
Example: S&P 500 index grew by 97.05% between 31st August, 2010 and 31st March, 2015. Iris Investment beta was 0.55 and therefore, the risk-adjusted net return of Iris Investments was expected to be 0.55 * 97,05 = 53,77%. The net return of Iris Investments over this period was in fact 120.17%. The fund net return was by 120.17%-53.77%=66.4% greater than the market expectations, hence the funds' alpha 66.40.
Alpha/beta and their evolution:
|| last 12 months
|| last 36 months
||last 60 months
| II gain
Investors often use both alpha and beta to judge a fund's performance.
Investors generally opt for a high alpha and a low beta. But other
investors might like the higher beta, trying to cash in on markets
volatility. On the other hand, if the fund has a high alpha, but also a
high beta, conservative investors might not be so happy. That's because
the beta might make them withdraw their money when the investment
is doing poorly - due to the increased volatility of the markets,
the risk of losses becomes elevated.