Tue, May 23, 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. Opalesque Exclusive: Time to invest in robotics? (part 1)[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: The London-based, Swiss-born manager of the RoboCap UCITS Fund, talks to Opalesque about investing

  2. Investing - Hedge funds have been selling big winners this year, Hedge funds are betting $1 billion that Snapchat shares are going to drop, Here are the biggest bets made by top hedge funds in the first quarter[more]

    Hedge funds have been selling big winners this year From CNBC.com: Hedge fund managers' most popular stock to start the year has been a familiar name that is falling short in terms of performance, while the least popular companies all have been crushing the market. Procter & Gamble

  3. Investing - Third Point's Loeb surfs on as hedge fund washout continues, George Soros has added to his losing bets against the stock market, Hedge funds, VCs and the CIA are throwing money at ex-Bridgewater data scientists' startup, Hedge funds shed retail amid fears of "apocalypse"[more]

    Third Point's Loeb surfs on as hedge fund washout continues From Reuters/Nasdaq.com: Billionaire investor Daniel Loeb said on Thursday that he is still making money even as the hedge fund industry struggles. Loeb, who oversees the $16 billion hedge fund firm Third Point LLC, sa

  4. Investing - Tudor Jones backs AI hedge funds, Massive hedge fund trades highlight insider buying: GE, Pentair, Tempur Sealy, Apollo Global and more, Hedge funds big wigs are buying consumer and selling tech, here's the stocks[more]

    Tudor Jones backs AI hedge funds From FT.com: Hedge fund magnate Paul Tudor Jones has invested in a brace of artificial-intelligence powered "quantitative" hedge funds, underscoring the increasing acceptance that the industry will need to turn more to technology and away from traditional

  5. Opalesque Roundtable: Rise of high-frequency trading in Europe a challenge for traditional asset managers[more]

    Komfie Manalo, Opalesque Asia: The rise of high-frequency trading in Europe, dominating over 80% of the market, has become a challenge for traditional asset managers especially when it comes to risk management, said Philippe Malaise, chairman of advisory firm