Thu, Apr 24, 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   |   
Banner
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. …And Finally – Flight attendant has passengers rolling in aisle[more]

    From Orange.co.uk: A video of a US flight attendant turning her safety talk into a comedy routine is proving a huge hit online. More than five million people have watched the clip of Marty Cobb which has her passengers rolling with laughter on a Southwest Airlines flight to Salt Lake City.

  2. Niche Investing – Wealthy investors flock to fine art funds[more]

    From Clickorlando.com: Wealthy investors looking to diversify beyond stocks and bonds are now turning to an unusual money-making vehicle -- the art investment fund. The name says it all: These funds invest in fine art and seek returns by acquiring and selling high-end pieces for profit. Growth

  3. Opalesque Exclusive: Rainwater and Blue Sky - an Australian water fund emerges[more]

    Bailey McCann, Opalesque New York: Financial reporters often tout new funds and investments as uncorrelated investments, but few can say they are uncorrelated to everything but weather. Enter Blue Sky Alternative's water fund which invests in the permanent rights to Australia's water. Sev

  4. University of Michigan allocates $242m to six managers[more]

    From PIonline.com: University of Michigan, Ann Arbor, invested or committed a total of $242 million to one traditional equity manager and five alternative investment funds from its $9 billion endowment. University regents approved the hire of Mittleman Investment Management to run $35 million in act

  5. Performance – Odey flagship hedge fund suffers brutal March as shorts rise, Blackstone first-quarter profit rises 30% on higher fees[more]

    Odey flagship hedge fund suffers brutal March as shorts rise From Valuewalk.com: The tide has turned for the worse for one of Europe’s best performing hedge funds. Crispin Odey’s flagship hedge fund, Odey European has suffered a 4.63% decline for the year after slipping 7.2% in March, ac