The assignment is based on a case study that discusses evaluation of hedge fund returns. George (Yiorgos) Allayannis: “The Dynamis Fund: An Energy Hedge Fund,” UVA-F-1337, Darden Business Publishing.
A. Comment on the composition of the Energy Portfolio. Is the portfolio well diversified? What macroeconomic variables will have a large impact on the performance of companies included in the Energy Portfolio?
B. In what aspects are hedge funds fundamentally different from mutual funds?
Why did Scott & Stringfellow start the Dynamis Fund in addition to its Energy Portfolio?
C. What does it mean for a strategy to be market neutral? Is the Dynamis fund market neutral?
D. What is the fee structure of a typical hedge fund? Why, in your opinion, do funds use high water marks?
E. Compute the following two Sharpe ratios: the Energy portfolio for the period February 1993-March 1998 and the Dynamis Fund for the period 02-Jul-97-19-Mar-1998. Express the Dynamis Fund average return and standard deviation in monthly units before calculating the Sharpe ratio. Comment on the difference in the Sharpe ratios of the two investments. Is it driven by the average return or risk?