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Institutional investors want consistency more than they want returns. Career risk is a bigger concern than your retirement balance. In turn, hedge fund traders
by paulsutter 8y ago
Institutional investors want consistency more than they want returns. Career risk is a bigger concern than your retirement balance.
In turn, hedge fund traders are paid for returns, but fired for volatility. Firms like Point72 literally have a "down and out" clause in their contract: if you have a certain percent drawdown you will be fired. Internally, hedge funds backtest against measures such as IR (information ratio) and not against returns. IR penalizes for volatility and rewards consistency.
https://www.investopedia.com/terms/i/informationratio.asp https://www.investopedia.com/terms/i/informationratio.asp
- throwawaymath 8y ago> Internally, hedge funds backtest against measures such as IR (information ratio) and not against returns. IR penalizes for volatility and rewards consistency. Hedge funds are not a homogenous enough group to make a blanket statement like this.
- echion 8y agoAll generalizations are over-generalizations? GP is a fair comment, actually: nobody that knows anything about how risk works wants to see a returns number. If a fund doesn't backtest against IR, or penalize for volatility, it's not going to be getting significant investments.