Before investing in any trading fund, it is important to evaluate its past performance. In this blog post, we will cover what to look for when evaluating a trading fund’s past performance, including the importance of considering risk and reward.
We will take a look at how to measure a fund’s Sharpe ratio, evaluate a fund’s alpha and beta coefficients, compare a fund’s returns to an appropriate benchmark, look at a fund’s drawdowns and volatility, and consider the time period you plan to invest in the fund with canada futures trading.
What to Look for When Evaluating a Trading Fund’s Past Performance
When evaluating a trading fund’s past performance, there are several key metrics that you should look at. These include the fund’s risk-adjusted return (Sharpe ratio), alpha and beta coefficients, return compared to an appropriate benchmark, drawdowns, volatility, and time period. Let’s take a closer look at each of these in turn.
(Sharpe Ratio) Risk-Adjusted Return
The risk-adjusted return on investment is gauged by the Sharpe ratio. In other words, it provides you with the return on investment for each unit of risk. The Sharpe ratio is determined by dividing the investment’s standard deviation by the return on investment after deducting the risk-free rate. A higher Sharpe ratio means that you are getting more return per unit of risk.
Alpha and Beta Coefficients
Alpha is a measure of return that is not explainable by movements in the market. In other words, it is the portion of return that is due to skill rather than luck. A positive alpha means that the manager has outperformed the market. Beta is a measure of the sensitivity of an investment’s return to swings in the market. A higher beta means that the investment is more volatile than the market.
Return Compared to Appropriate Benchmark
It is also important to compare the return of the fund to an appropriate benchmark. For example, if you are evaluating a bond fund, then an appropriate benchmark would be another bond fund with similar characteristics, such as duration or credit quality. If you are evaluating an equity fund, then an appropriate benchmark would be an index such as the S&P 500 index.
Drawdowns and Volatility
Another important metric to look at when evaluating a trading fund’s past performance is its drawdowns and volatility. Drawdown is defined as the peak-to-trough decline during a specified time period for investment or security. Volatility is a measure of how much prices fluctuate over time. A higher volatility means that prices are swinging up and down more sharply, and thus, there is more risk.
So, those are some of the key metrics to look for when evaluating a trading fund’s past performance. It is important to consider all of these factors.
When choosing which trading funds to invest in, it is important to carefully evaluate each one’s past performance using metrics such as Sharpe ratio, alpha and beta coefficients, return compared to appropriate benchmarks, drawdowns, volatility, and time period invested.
By doing so, you can make sure that you are investing in trading funds that have proven themselves to be successful in various market conditions over time.