Sun, Oct 4, 2015
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. Performance - Hedge fund moguls Einhorn, Loeb, Rosenstein lose money in September, Risky strategy sinks small hedge fund[more]

    Hedge fund moguls Einhorn, Loeb, Rosenstein lose money in September From Billionaire stock pickers David Einhorn, Daniel Loeb and Barry Rosenstein on Wednesday told their wealthy investors they lost money in September as market turmoil inflicted more pain on some of America'

  2. Opalesque Exclusive: IRAs represent billions of untapped capital for hedge funds[more]

    Benedicte Gravrand, Opalesque Geneva: Retirement accounts might not be the first source that comes to mind for those looking to raise funds, but they may represent billions of untapped capital. Unlike traditional retirement accounts,

  3. Opalesque TV: One way to access market hedge funds in the EU under the AIFMD radar[more]

    Benedicte Gravrand, Opalesque Geneva: While the Cayman Islands, the US and Hong Kong await the pan-European marketing passport to be extended to alternative investment fund

  4. Investing - U.S. biotech bloodbath hits hedge funds but some bargains emerge, Computer-driven hedge funds betting on further stock selloff[more]

    U.S. biotech bloodbath hits hedge funds but some bargains emerge From A seven-day selloff of U.S. biotechnology stocks has hit sector investors - especially hedge funds - hard. But some managers say it was overdone and are already eyeing bargains such as Gilead Sciences Inc

  5. Vilas’ equity long bias hedge fund generates market-beating results[more]

    Komfie Manalo, Opalesque Asia: The Vilas Fund, an equity long bias fund managed by Chicago, Illinois-based Vilas Capital Management, posted five-year annualized returns, net of fees, of 23.47% vs. 15.87% for the S&P 500 Index, including divid