Choice of Performance Measure for Hedge Funds
The Sharpe ratio is often used for evaluating hedge fund performance. However, it has often been criticized for relying on the assumption that returns are normally distributed.
In the September 2007 Journal of Banking and Finance, Eling and Schuhmacher examine the Sharpe ratio and other performance measurement tools for evaluating hedge funds. By ranking hedge fund returns against 12 different performance measures, they find a high correlation between the different measures, suggesting that the choice of measure may not be a significant concern. The lowest correlations are between the Sharpe ratio, the Treynor ratio and Jensen’s alpha.
Given its practical advantages over other return measures, the Sharpe ratio’s popularity is now supported by empirical evidence. The authors find it to be an adequate measure of hedge fund performance.
For more information, see all articles on: Alternative Assets, Hedge Funds, Investment Returns, Performance Measurement, Research See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
