Hedge fund and CTA performance comes into consideration more often when traditional markets tend to drop – then investors start looking for “alternatives” that can protect or even perform in difficult market environments. Selecting a good fund is not a trivial task, however, and consists of many very important steps, from initial quantitative evaluation to a comprehensive due diligence and legal review. And proper peer group comparison can reveal how the fund stacks up against those trading in the same space and the same strategy, and reveal if its performance is driven primarily by the overall strategy or has competitive skills.

The Illusion of Standalone Performance

The typical question investors ask a fund manager is “What is the track record?” And while it is definitely important, looking at absolute returns of a single fund can be dangerously misleading. A fund delivering +12% annualized over 3 or 5 years can seem impressive, but what if its peers averaged +18% with less volatility for the same time frame? Or if the source of returns was primarily the exposure of long equity beta in a bull market?

Without comparison, the stand alone returns can hide more than they reveal, and that is where Peer Group comparison comes in.

Why Peer Comparison Matters

Hedge funds employ many strategies to take advantage of market exposure or deficiencies. Comparing funds from different strategies, such as macro or market-neutral, for example, is like comparing athletes competing in different sports. The training, the risk, and the payoff profiles are dramatically different. Peer group analysis done right solves these major issues:

1. Clarifies performance by strategy and level of risk, ensuring that you are comparing apples to apples
2. Adjusts for the actual opportunity set. Returns from a booming equity long/short fund should not be judged by the same standards as a CTA in 2020.
3. Highlights relative skill, where the true skill shows up as outperformance against peers facing the same market conditions

Key Steps in Peer Group Comparison

Step 1. Classify the Fund Accurately

Use strategy breakdowns and not just general headline labels. For example:

• “Event Driven – Global Merge Arbitrage”
• “Equity L/S – US-focused, Low Net Exposure”

Step 2. Select or Create a Meaningful Peer Group

There are multiple sources to use:

• Hedge fund databases (Prequin, BarclayHedge, NillsonHedge, eVestment)
• Internal historical fund lists – many investors receive monthly updates and newsletter highlight fund performance from hedge funds of interest
• Custom peer baskets created using clustering, correlations, or style factors

Step 3. Compare Key Metrics Over Time

Metric	What to Watch
Total & Annualized Return	Rank vs. median/mean of peer group
Sharpe/Sortino Ratio	Adjusted for volatility
Drawdowns	Peak-to-trough losses vs. peers
Rolling Alpha	Based on factor exposure or passive benchmarks
Consistency	Percent of months/quarters above peer median

Step 4. Visualize Peer Relative Performance

Use revealing charts that highlight various aspects of performance:

Heatmaps (annual or even quarterly)

Rolling performance, volatility, risk adjusted statistics (Sharpe and Sortino)

Use Proper Tools

Managing performance data for multiple funds, working with hedge fund databases, and creating, tracking, analyzing and updating peer groups can be a very challenging and time intense task without proper tools. A proper tool can remove the need for using and updating a multitude of spreadsheets and instead of maintenance dedicate the analyst time to actual analysis. AlphaBot, for example, has specifically designed functions for return data management, database access, and peer group analysis where most of the aforementioned tasks can be done in minutes.

What Peer Group Comparison Cannot Do (By Itself)

• Due diligence cannot be replaced by quantitative screening
• Overfitting can cause more harm than good due to data noise or survivorship bias
• Unique trading skills of a hedge fund manager can actually them to underperform in certain environments when they are avoiding consensus risk

Key Takeaways

• Absolute returns are not enough as they do not account for risk, opportunities, or strategy context
• Proper peer group comparison helps differentiate true alpha against market or beta-driven gains
• Consistency of performance vs peers is more important than outliers
• Using proper tools is essential to focus on the analysis and conclusions instead of data management

(c) AlphaBot 2025