Financial Education

When measuring hedge fund performance, one simple tool is to look at average gains and losses for periods.

The average gain considers only periods in which there was a gain, and is the simple average return in those periods. Likewise, the average loss is the simple average return in all periods in which there was a loss.

The gain to loss ratio is the average gain divided by the average loss.

What the gain to loss ratio does not tell you is how many periods realized gains and how many realized losses. It also fails to account for compounding of returns.

Investors are required to hold for a specified time and provide a specified advance notice before redeeming. These restrictions permit the manager to take a longer-term point of view and invest in less liquid securities.