Conditionally Fitted Sharpe Performance with an Application to Hedge Fund Rating

Abstract:     
This paper reviews the fund ratings based on Sharpe performance measures. We define a battery of performance measures in a mean-variance framework. They differ by the information taken into account in their computation, but also by the potential use of the fund by the investor. We apply these performance measures to a set of hedge funds and discuss how the corresponding ratings depend on the assumptions concerning investor's holding and information. Four advantages of Sharpe performances can be underlined and are especially important for the retail investor. First, the measures correspond to the standard ones used for mutual funds and known by retail investors. Second, the numerical results can be compared, even if they are obtained with different assumptions. Third, the rankings are based on regression analysis and thus easy to compute. Fourth, these performance measures can be easily used in the design of an optimal basket of hedge funds. The performance measures can also be used to partition the set of funds into homogenous segments.

Number of Pages in PDF File: 47

Keywords: Hedge Fund, Sharpe Performance, Sharpe Ratio, Fitted Performance, Fund Rating, Segmentation, Standardisation, Term Structure

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