White Paper Examines The Importance of The Underutilized Appraisal Ratio in Assessing New Investments

November 12, 2014 07:00 AM Eastern Standard Time

EVANSTON, Ill.—( BUSINESS WIRE )—Evanston Capital Management, LLC, an alternative investment management firm with approximately $4.9 billion in assets under management, today published a report examining methods of evaluating performance for hedge funds and other investments. The white paper, How To Evaluate Hedge Funds Or Any New Investment: Alphas, Sharpe Ratios, and The Underutilized – But Most Important – Appraisal Ratio, is available at www.evanstoncap.com.

Hedge funds are often criticized within the investment community for poor performance compared to the S&P 500. However, such a comparison is inadequate for hedge funds or other investments, according to the paper. Rather, investors should be evaluating new investments based on the ability to increase the total portfolio’s Sharpe Ratio in keeping with modern portfolio theory (“MPT”). One way to accomplish this is through use of the lesser-known Appraisal Ratio. Although historically underutilized, this ratio enables investors to simultaneously account for and evaluate an investment’s expected return, risk, and diversification attributes. This paper discusses why the Appraisal Ratio is critical to investment evaluation in MPT, how it is calculated and the common misperceptions held with regard to portfolio performance evaluation.

“As a former finance professor, I am always taken aback by how many investors are ignoring basic modern portfolio theory when evaluating the performance of hedge funds and other investments within their portfolios,” said Peter Hecht, Ph.D. Vice President, Senior Investment Strategist, Evanston Capital Management. “There is also a tendency to focus too much on an individual investment’s Sharpe Ratio, expected return and correlation properties and not enough on beta-adjusting returns and risk-adjusting alphas.”

“Our goal with this paper is to remind investors to take a holistic look and to evaluate each investment within the context of the full portfolio, which the Appraisal Ratio does,” said Adam Blitz, Principal, CEO and CIO, Evanston Capital Management.

About Evanston Capital Management

Evanston Capital Management, LLC (“ECM”) is an alternative investment management firm focused on providing multi-manager hedge fund programs for institutional and high net worth investors. Formed in 2002, ECM manages a variety of strategies emphasizing more concentrated portfolios, and ECM seeks to identify portfolio managers in which ECM has gained high conviction. ECM manages commingled funds and offers customized solutions to clients looking to tailor their hedge fund program. ECM has approximately 300 institutional investor relationships and approximately $4.9 billion in assets under management. For more information, please visit www.evanstoncap.com.