Thu, Oct 30, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

GFIA white paper: Investing in hedge funds based on their historic Sharpe ratios is likely to disappoint

Friday, October 23, 2009
Investing in hedge funds based on their historic Sharpe ratios is likely to disappoint GFIA pte ltd, the Singapore based specialist in skill-based managers in Asian and emerging markets, has released a research paper examining the persistence of the Sharpe ratio, a commonly used measure of risk-adjusted return investors, and therefore its effectiveness as an substantive decision making tool.

In this paper, GFIA looks at the persistency of the commonly-used ratio, both at the level of the Asian hedge fund industry overall, and at the strategy level for the five biggest strategy groups.

GFIA also notes that the appropriateness of the Sharpe ratio in the context of hedge funds is questionable, given their typically non-normal return distribution.

- There is no consistency in the strategy mix of the best (worst) performing funds, over different time periods

- Top (worst) performing funds were seldom best (worst) performing in the subsequent period

- No more than 50% of funds in one performance category remained in the same category the subsequent year.

- Macro/ multi-strategy funds showed least persistence in Sharpe ratios over different time periods

Peter Douglas CAIA, FICP, principal of GFIA, commented: “We’ve always been sceptical of Sharpe ratios applied to hedge fund returns, but this research suggest that not only is the ratio academically inappropriate for measuring asymmetric return patterns, but it has almost no predictive power anyway! Allocators clearly should not rely on historic Sharpe ratios as a decision tool in constructing portfolios of Asian hedge funds.”

The white paper is available at www.gfia.com.sg.

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
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. Manager Profile - Seth Klarman: Lessons for retail and institutional investors[more]

    From Valuewalk.com: Seth Klarman is virtually unknown outside value circles, despite his impressive record and value of assets under management. On average Baupost has returned 19% p.a. despite holding a large portion of its assets in cash. During the financial crisis, Seth Klarman’s funds lost some

  2. North America - FATCA leads 75% of U.S. expats to consider dropping citizenship[more]

    From International-adviser.com: Nearly three quarters of American expats are considering the renouncement of their citizenship following July’s introduction of the “absurd” Foreign Account Tax Compliance Act (FATCA). The findings, which were revealed in a survey by deVere, come alongside the news th

  3. Goldman in talks to acquire IndexIQ[more]

    From Bloomberg.com: Can Goldman Sachs put ETF investors on a liquid diet? Goldman is in talks to acquire IndexIQ, Reuters has reported. Index IQ is a small exchange-traded-fund firm known mostly for products that replicate hedge fund strategies, called "liquid alternative" ETFs. While IndexIQ has 11

  4. Other Voices: CALPERS dilemma should be a warning to hedge funds wanting institutional investors[more]

    From Ian Hamilton, founder of IDS Group. A quick comment on the CALPERS’ disinvestment from the hedge fund market and the jitters it is causing. Pension Funds should not be sheep and follow CALPERS’ decision as the issues that CALPERS has with hedge fund investments are in many ways unique t

  5. Hedge funds fell 1.18% in September on Fed tightening and ECB loosening[more]

    Komfie Manalo, Opalesque Asia: Hedge funds fell 1.18% in September on Fed tightening and loosening of the European Central Bank’s policy on equity markets, according to the Barclay Hedge Fund Index co