Your friend tells you that s/he has invested in a “wonderful” hedge fund that has generated an annual rate of return of 23% (before performance fees) and a standard deviation of 32%. Let us say that these returns and risk have been obtained for the last 5 years. You want to investigate whether this hedge fund has over- or under-performed a strategy of investing in a passive portfolio that takes an exposure to the S&P 500 and the risk-free. Over the same five years over which the hedge fund is analysed, the S&P 500 has generated returns of 14% with a standard deviation of 17% and the risk free had returns of 1%.

 What can you conclude regarding the performance of the hedge fund? Would you invest in this hedge fund?