Question

Suppose money manager A has earned an average return of 12% over the past 5 years,...

Suppose money manager A has earned an average return of 12% over the past 5 years, while manager B has earned 8% over that span. The S&P 500 has returned 10% over the same period.  There are 3 possibilities: 1) manager A outperformed manager B; 2) Manager B outperformed manager A; and 3) they performed equally well. Explain each scenario.

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Answer #1

Solution

As a money manager of a hedge manager, it is important to consider performance of the portfolio compared to the market. When considering this performance, it is important to consider performance compared to the market for a long period of time and not just a short time frame. Customers should be aware of the performance of the money managers and make decisions appropriately given their investing return requirements.

Out of the three options, option 1) seems to be the most relevant, that is manager A has outperformed manager B. This is evident by the fact that manager A has experienced a return of 12%, which is above the return of the S&P 500 over the same period, while manager B has experienced a return of 8%. Not only has manager A outperformed manager B, they have also outperformed the market.

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