Sat, Dec 16, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Alternative Market Briefing

Academic finds Sharpe ratio et al wanting in measuring hedge fund performance

Monday, April 29, 2013

Beverly Chandler, Opalesque London: Marcos Lopez de Prado of Hess Energy Trading Company, Lawrence Berkeley National Laboratory has published a paper entitled The High Cost of Simplified Math: Overcoming the 'IID Normal' Assumption in Performance Evaluation.

Lopez de Prado finds that investment management firms routinely hire and fire employees based on the performance of their portfolios, and lists the methods of measuring that performance as popular metrics that assume IID Normal returns, such as Sharpe ratio, Sortino ratio, Treynor ratio, Information ratio and so on.

He finds that investment returns are far from IID (Independent and Identically Distributed) Normal. Lopez de Prado says: "Firms evaluating performance through Sharpe ratio are firing up to three times more skilful managers than originally targeted. This is very costly to firms and investors, and is a direct consequence of wrongly assuming that returns are IID Normal."

He finds that an accurate performance evaluation methodology is worth a substantial portion of the fees paid to hedge funds. "There is a 20% loss of the drawdown for every false positive. For a large firm, this amounts to tens of millions of dollars lost annually, as a result of wrongly assuming that returns are IID Normal."

In cases with first-order serial correlation, Lopez de Prado finds that the Maximum Drawdown is generally greater ......................

To view our full article Click here

Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Mediobanca acquires majority stakes in Swiss hedge fund[more]

    Komfie Manalo, Opalesque Asia: Listed diversified banking group Mediobanca SpA said it has acquired a majority stake in Geneva-based hedge fund firm RAM Active Investments SA (RAM AI), an active and alternative asset manager offering a range of act

  2. Northleaf Capital Partners closes debut private credit fund on $670M[more]

    Bailey McCann, Opalesque New York: Northleaf Capital Partners has closed its debut private credit fund - Northleaf Private Credit I - on $670 million. The vehicle will invest in private credit transactions in Europe and North America, with a primary focus on lending to private equity-backed compa

  3. ...And Finally - The ongoing gun saga in the U.S.[more]

    From Newsoftheweird.com: As elder members of the First United Methodist Church in Tellico Plains, Tennessee, gathered on Nov. 16 to discuss the recent church shooting in Sutherland Springs, Texas, one of those present asked if anyone had brought a gun to church. One man spoke up and said he c

  4. Opalesque Exclusive: Credit Suisse Asset Management's NEXT Investors leads $6M Series A round for LUX Technology and Services[more]

    Bailey McCann, Opalesque New York: Credit Suisse Asset Management's NEXT Investors has led a $6 million Series A funding round for LUX Technology and Services, a business and technology solutions provider for the alternative assets industry. The investment will be used to fuel growth of Trans

  5. eVestment: hedge funds extend winning streak[more]

    Bailey McCann, Opalesque New York: Hedge funds marked their 13th consecutive month of positive returns in November with +0.47% average returns for the month, according to the latest Hedge Fund Performance Report from eVestment. Activists, long/short and quant equity strategies are producing