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By Christine Gaylican, Opalesque Asia:
GFIA, a Singapore-based independent research and advisory firm, has raised some important points as it questioned the relevance of Sharpe ratios in evaluating the performance of hedge funds and other alternative investments.
In its latest white paper, “The Myth of Persistent Sharpe Ratio,” GFIA scrutinized disappointing results of hedge funds based on Sharpe ratios especially in predicting future fund performance.
“The Sharpe ratio may provide historical insights, but it has little or no value as a forward-looking investment tool,” said GFIA.
The firm set out to prove that the Sharpe ratio is an unreliable measure of risk adjusted returns for alternative investments and urged a re-think of the use of this measurement.
Over-dependence on Sharpe ratios is risky
Managers and investors have relied on Sharpe ratio as a core input before making an investment decision over the years. However, for hedge funds, GFIA wants to show that a Sharpe ratio could not be fully relied upon to show the true value of risk-adjusted returns as it is influenced by market conditions and varying periods used.
Unlike the returns of common stocks and mutual funds, hedge fund returns are generally not normally distributed. Therefore, GFIA isolated returns of funds from 2007 until July 2009. Only funds that were established on or before July 2007 were included in the study and those which did not report their n...................... To view our full article Click here
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