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Komfie Manalo, Opalesque Asia:

Commodity trading advisor MSR Investments sided with the California Public Employees' Retirement System’s decision to ditch its hedge fund investments.

MSR Investment founder and CEO Michael S. Rulle Jr., said that the Sharpe Ratios reported by hedge fund indices (and by definition hedge funds themselves) are significantly overstated due to the fact that serial correlation is not included in the calculation of estimated annual volatility.

Rulle said, "The Credit Suisse Broad Hedge Fund Index, for example, reports an annualized Sharpe Ratio of 0.802 from inception through May 2014 when its actual annual Sharpe Ratio (i.e. the Sharpe Ratio that directly calculates the standard deviation of 20 years of annual returns) is 0.54." In his essay entitled, Average Annual Fees on Investable Hedge Fund Indices and Fund of Fund Indices can and do reach 50% of Gross Returns (download here), Rulle said he intended to demonstrate that in addition to being subject to notable serial correlation, hedge fund returns are hampered by excessive "path dependent" fee structures and also uncertain return expectations.

The hedge fund fee discussion

According to Rulle, hedge funds assets ......................

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