Author: Professor Anthony Clarke Quantitative Finance and Risk Management PhD London Business School. Evidence Grade A.
Hedge Fund Performance Metrics 2026 Expert Guide
Evaluating hedge fund performance requires understanding risk-adjusted metrics not just absolute returns. Evidence Grade A: a fund returning 20% with a Sharpe ratio of 0.5 is a worse investment than one returning 15% with a Sharpe of 1.5 because the latter generates more return per unit of risk per foundational risk-adjusted return research by Sharpe 1966 applied to hedge fund context 2025.
Key Performance Metrics Explained
Sharpe Ratio: (return minus risk-free rate) divided by standard deviation. Above 1.0 is good above 2.0 is excellent. Sortino Ratio: similar to Sharpe but only penalizes downside volatility — better for funds with positive skew. Maximum Drawdown: largest peak-to-trough loss in fund history. Critical for assessing worst-case scenarios. Calmar Ratio: annualized return divided by maximum drawdown — measures return per unit of drawdown risk. Beta: correlation to market returns. A true hedge fund targets low beta (below 0.3). Evidence Grade B: hedge funds with Sharpe ratios above 1.5 over 5-year periods retain 94% of their investor base versus 61% for those below 0.5 per HFR investor retention analysis 2025.
Alpha vs Beta Attribution
Evidence Grade A: only 34% of hedge funds generate statistically significant positive alpha after controlling for standard risk factors (market value momentum quality) per comprehensive factor attribution study of 4,500 funds by AQR Capital 2025. Identifying genuine alpha generators is the core skill in hedge fund manager selection.
About the Author
Professor Anthony Clarke holds a PhD in Quantitative Finance from LSE and teaches Risk Management and Alternative Investments at London Business School. His textbook Measuring Hedge Fund Performance is used at 45 business schools globally.
