Dr. Tucker Balch Associate Professor School of Interactive Computing Computational Investing, Part I 022: Common Metrics for Hedge Funds Find out how modern.

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Dr. Tucker Balch Associate Professor School of Interactive Computing Computational Investing, Part I 022: Common Metrics for Hedge Funds Find out how modern electronic markets work, why stock prices change in the ways they do, and how computation can help our understanding of them. Learn to build algorithms and visualizations to inform investing practice. School of Interactive Computing

What are Investors Looking For? 2

 Annual return.  Risk: Standard deviation of return.  Risk: Draw down.  Reward/Risk: Sharpe Ratio.  Reward/Risk: Sortino Ratio.  Jensen’s Alpha. Common Metrics 3

Example 4 Retur n SharpeSTDEVD-downCorr Fund33% %-8.67%0.89 $DJI43% % % 1.00

 metric = (value[end]/value[start]) – 1  Example: $100 to $110: (110/100) – 1 = 0.10 = 10% Annual Return 5

 daily_rets[i] = (value[i]/value[i-1]) – 1  std_metric = stdev(daily_rets) Standard Deviation of Daily Return 6

Max Draw Down 7

 Reward/Risk = How much reward are you getting for your risk?  metric = (average(daily_rets)/stdev(daily_rets)) * sqrt(250) Sharpe Ratio 8

 Find online broker to “paper trade.”  Invest $1M in 4 equities.  Assess your portfolio for 2011: Annual return Average daily return Stdev of daily return Sharpe Ratio  Compare with benchmark: SPY  Submit.pdf printout of your spreadsheet. Screenshot of your portfolio online. Homework 1 9

Demo Using Excel 10

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