The truth about hedge fund risk
Forget tail statistics -- the point is to focus on manager preparedness for surprises early on in the process of investor due diligence
Elmer Rich III
The data we have seen on hedge fund models is that they are demand (sales) driven. Some investors want to believe that outsized returns with negligible risk are possible so products were created to pretend this is so. “A fool and his money are invited everywhere.”
Risk = known probability of an outcome
Uncertainty = unknown probability of an outcome.
Much of the money in financial services is made by misrepresenting “uncertainty” as “risk.” No more so than with “hedge” investments where even the name was created to suggest “uncertainty” mitigation.
I use the Omega Ratio regularly in my work. It’s a far superior risk measure to the Sharpe or Sortino Ratio and should be more widely used. There’s a spreadsheet to calculate the Omega Ratio at http://investexcel.net/219/calculate-the-omega-ratio-with-excel/