nba559_2008_02_23_lecture_4 - NBA 559 Lecture 4:...

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NBA 559 Lecture 4: Benchmarking in a Nutshell Jesse Reyes Managing Director Bear Stearns Private Funds Group
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2 Overview What are we measuring and why is it so difficult What/how do we benchmark Industry performance
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NBA 559 Part 2 What are we measuring and why is it so complicated.
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4 Typical Question “Our/Some Fund Has a Return of 300 Percent” Is that good? Depends?
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5 Depends on What? Over What Time period Over Two Years -- great at 173% per year Over Ten? --- hmmm!! At 11.61% Is it return on the investments the fund made or is it the return to the investors in the fund. Time Weighted/IRR/Realization/Horizon?
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6 Example 1 Invest $1.5 million Worth $5 million What is the return?
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7 What is the Return? Invest $1.5 million Worth $5 million What is the return? 5/1.5=333% Total Return or percentage change of 233% Note – we haven’t defined a time period
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8 Example 2 Invest $1.5 million Worth $5 million five years later What is the return?
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9 Example 2 What is the Return? Invest $1.5 million Worth $5 million five years later What is the return? 5/1.5 = 333% Total Return Lets annualize with formula (total return)^(1/5) -1 = 27.2% This is the annual rate of return (compound annual growth rate, Geometric average return, Time weighted return, etc)
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10 Example 3? Invest .5 in three years .5 at the beginning of year 1 .5 at the beginning of year 2 .5 at the beginning of year 3 Worth $5 million at the end of year five
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11 Why The difference? First two examples are just examining two points in time. i.e .today and some point in the past. No transactions or cashflows occurred in the in between. The third example, complicated the calculations because we didn’t invest the $1.5 all at once. Notice that stock indices use the first approach-you only calculate returns at two points in time – assumes that you buy and hold. The third has shortened the average investment holding period so the time value of money says that the return is higher other things being equal.
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12 Why The difference? Gets even more complicated if we measure returns for an investment where we also take money out over a period of time as well as put money in over a period of time.
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13 Why The difference? Same with your savings account – if you put money in at one point and take it out at another point, you can calculate the return for that period of time which will be the APR, but if you put money in, take money out over a period time, the actual return over the life of your investment getting is not the APR but something different that depends on the average time you held the money. The APR assumes you put money in a lump and hold it
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14 Why The difference? You have the same complications if you measure the return to an investment manager/
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nba559_2008_02_23_lecture_4 - NBA 559 Lecture 4:...

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