Risk-Adjusted
Categories: Managed Funds, Metrics
A fund may have doubled in a given year—yep, it went up 100% in one year. You paid $10 a share for that fund, and now it's worth $20 a share.
Did the managers do a good job? Well, there's an easy "of course!" in there because you doubled your money in one year—how can that possibly be bad? Well, what if the managers only invested your money in a series of California State Lottery tickets and it just happened that one of those tickets won and paid off huge, so that while 99.9% of your portfolio went bankrupt (or ended up being worth zero when the Scratcher returned a frowny face), 0.1% made a 100,000x return.
On a risk-adjusted basis, the fund was bad; the managers took insane and irresponsible amounts of risk. They returned a dandy absolute number but could very easily have had your $10 a share investment be worth $0.00 a share a year later.
Not good investment management practice.