Tue, Jul 29, 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. Opalesque Roundtable: Success in hedge fund marketing not linked to performance, but investor appetite[more]

    Komfie Manalo, Opalesque Asia: Success in marketing a fund is not linked to the performance, but to investor appetite, to the way you can market the fund, and to how much time you can spend to raise assets, said Antoine Rolland, the CEO of incubator and seeding firm

  2. Hedge fund manager Winton Capital making headway with long-only strategy[more]

    From PIonline.com: North American investors are helping Winton Capital Management Ltd. make progress — albeit slowly — toward its founder's goal of becoming a $100 billion company. The firm's ticket to quadrupling its assets under management is unlikely to be one of its scientifically designed manag

  3. Opalesque Radio: Now is a good time to buy protection cheaply in the options market[more]

    Benedicte Gravrand, Opalesque Geneva: Investors are showing an increased interest in risk parity funds and strategies, Opalesque reported last year. Risk parity strategies have the

  4. The Big Picture: Charlemagne Capital smoothes risk out of frontier market investing with portfolio approach[more]

    Benedicte Gravrand, Opalesque Geneva: Opalesque recently talked to one of the portfolio managers of the Oaks funds, which are emerging and frontier market hedge funds focusing on equity long/short with a directional approach. They are run by

  5. Winton’s low-cost equities fund tops $1bn for first time[more]

    From FT.com: Winton, the London-based hedge fund, has increased the assets in its low-cost equities fund to more than $1bn for the first time in a sign that traditional stock managers may come under increasing pressure from computer-driven rivals. Winton, which manages about $25bn in total ass