Whether the Sharpe ratio is an appropriate performance index for ranking hedge funds remains a controversial question among both academics and practitioners. Eling and Schuhmacher compared the Sharpe ratio with other performance measures and found virtually identical rank ordering using hedge fund data. They conclude that the choice of performance measure has no critical influence on fund evaluation. Their analysis does not include the new class of tailor-made performance ratios capable of being personalized to investment style as developed by Sortino and Satchell, Biglova et al and Farinelli et al. Specifically, we deal with the Sortino-Satchell, Farinelli-Tibiletti and Rachev ratios. Considering a large international hedge fund data set, we illustrate that if the ratios are tailored to a moderate investment style, they lead to rankings not too dissimilar to those found with the Sharpe ratio. But when the performance ratios are used to describe aggressive investment styles, rank correlations with the Sharpe ratio shrink drastically.
This article extends the classic Samuelson (1970) and Merton (1973) model of optimal portfolio allocation with one risky asset and a riskless one to include the effect of the skewness. Using an extended version of Stein's Lemma, we provide the explicit solution for optimal demand that holds for all expected utility maximizing investors when the risky asset is skew-normally and normally distributed. A closed expression is achieved for investors with constant absolute risk aversion.
Main academic criticism on the Sharpe ratio concerns its lack in incorporating skewness in performance evaluation. In this note we rewrite the classical Sharpe ratio for skew normal distributions. This new skew-normal Shape ratio consistently moves with skewness and no distorted information on performance is provided. An empirical investigation illustrates skew-normality of mutual and hedge fund returns. When investors are concerned about skewness, the use of the skewnormal
Sharpe ratio thus seems a proper choice for making performance rankings.
We compare capital requirements derived from tail conditional expectation (TCE) with those derived from the tail conditional median (TCM). In theory, TCE is higher than TCM for most distributions commonly used in finance and at fixed confidence levels; however, we find that in empirical data, there is no clear-cut relationship between the two. Our results highlight the relevance of TCM as a robust alternative to TCE, especially for regulatory control.
The article presents the findings of the study concerning the effect of elliptical distribution to returns in capital markets. It notes that elliptical distributions may be specified through the mean, variance, and density generator. Moreover, the Capital Assets Pricing Model retains validity to the elliptical distributions. It points out that the empirical research studies the 500 stock returns reveals by January 1990 to December 2004. It states that the good outcome reveals that best return rate is the log-logistic while the bad result shows that funds for the portfolio should be held in subset funds in the distribution to maintain CAPM.
A central issue in the academic debate concerning hedge funds is how the performance of such funds should be measured. The point of departure for our study is a view that is widespread in the relevant literature and which asserts that hedge funds cannot be measured applying the classic Sharpe ratio because of the atypical character of their higher return distribution moments. Instead, what is recommended is the use of newer performance measures that show the risk of loss. In conducting an empirical study based on hedge fund indices, we compare the Sharpe ratio with newer approaches to measure hedge fund performance. Although the re-turns of the hedge fund indices deviate markedly from a normal distribution, the various hedge fund strategies are ranked largely identical. We thus conclude that the choice of the performance measure has no critical influence on the evaluation of hedge fund indices.
In this paper, we investigate the German stock market with regard to "negative stub values" or "parent company puzzles". These are situations where a firm's market value is less than the value of its ownership stake in a publicly traded subsidiary. According to MITCHELL/PULVINO/STAFFORD (2002), negative stub values indicate clear arbitrage opportunities, which sometimes exist and persist.
First, we have collected five years of German stock market data from 1999 to 2003 in order to construct a sample of eleven negative stub values. Second, we analysed the performance of investment strategies based on the parent company puzzle. Finally, we applied different traditional closed-end fund discount and other theories to our sample of negative stub values.
This study supports the view of MITCHELL/ PULVINO/STAFFORD (2002), that mispricings exist and persist, because of costs associated with imperfect information. Due to imperfect information the ex ante expected profits of finding and exploiting negative stub values may be so small, that arbitrageurs do not enter the business of eliminating mispricings.
Eine zentrale Fragestellung in der wissenschaftlichen Auseinandersetzung auf dem Gebiet Hedgefonds stellt deren Performancemessung dar. Ausgangspunkt unserer Untersuchung bildet die in der Literatur verbreitete Meinung, dass Hedgefonds aufgrund ungewöhnlicher Ausprägungen der höheren Renditeverteilungsmomente nicht anhand der klassischen Sharpe-Ratio beurteilt werden können. Stattdessen wird die Verwendung neuerer Performancemasse, die das Verlustrisiko abbilden, empfohlen. Im Rahmen einer empirischen Untersuchung auf der Grundlage von Hedgefonds-Indizes vergleichen wir das kritisierte Performancemass mit den neueren Ansätzen der Performancemessung. Obwohl die Renditen der Hedgefonds-Indizes deutlich von einer Normalverteilung abweichen, führen die analysierten Ansätze zu weitgehend identischen Reihungen der verschiedenen Hedgefonds-Strategien. Von daher stellen wir fest, dass die Wahl des Performancemasses keinen entscheidenden Einfluss auf die Beurteilung der Hedgefonds-Indizes hat.
The Sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund. Hedge fund returns differ significantly from a normal distribution. For this reason, other performance measures for hedge fund returns have been proposed in both the academic and practice-oriented literature. In conducting an empirical study based on return data of 2,763 hedge funds, we compare the Sharpe ratio with 12 other performance measures. Despite significant deviations of hedge fund returns from a normal distribution, our comparison of the Sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds.
