Thu, May 24, 2018
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. Investing - Hedge funds hike Smurfit Kappa positions amid takeover deal hopes, Hedge fund IBV Capital digs deep to unlock long-term value in a competitive market, Eisman of 'The Big Short' fame recommends shorting Deutsche Bank[more]

    Hedge funds hike Smurfit Kappa positions amid takeover deal hopes From Irishtimes.com: Two US hedge funds, Davidson Kempner and York Capital, have accumulated a combined 4.74 per cent interest in cardboard box maker Smurfit Kappa using financial derivatives. It comes as many investors cl

  2. Foundations of hedge fund managers gave big to controversial donor-advised funds[more]

    In the world of philanthropy and tax-deductible charitable giving, the explosion of donor-advised funds has touched off intense debate. Now, there is evidence that the DAF boom is being further fuelled by hedge fund foundation money. Four of the top five foundations that gave the most to large do

  3. Third Point to raise $400 million for SPAC, Farley to run it[more]

    From Reuters.com: Daniel Loeb's hedge fund Third Point LLC plans to raise $400 million for a "blank check" company which will be run by outgoing stock market operator NYSE Group President Thomas Farley, according to a regulatory filing made on Tuesday. The new company, referred to on Wall Stre

  4. Study: For hedge funds, smaller is better[more]

    From Institutionalinvestor.com: The smaller the hedge fund is, the better its performance is likely to be, according to a new study. The study - "Size, Age, and the Performance Life Cycle of Hedge Funds," released April 26 - sought to determine whether a hedge fund's size and age had any effect on i

  5. Hedge fund returns rose in April for first gain since January[more]

    From Bloomberg.com: Bloomberg Hedge Fund Database shows returns flat this year - Currency strategies had the biggest monthly gain at 13% Hedge fund returns increased 0.78 percent in April, reversing two consecutive monthly declines. The swing of 134 basis points was driven by gains in all seven