Accounting for Skewness in Performance Evaluation of Brazilian Mutual Funds

Abstract

The Sharpe Ratio is probably the most widely known and used performance measure for mutual fund evaluation. However, it is based on the mean-variance theory and thus it is valid either for Normal returns or for quadratic utility functions. It does not take into account skewness of returns’ distributions. If we consider investors with negative skewness aversion, it is interesting to have a measure that goes beyond mean-variance. Koekebakker and Zakamouline (2009) propose a measure called ASSR (Adjusted for Skewness Sharpe Ratio) that generalizes the Sharpe ratio, accounting also for the skewness. However, the ASSR may result in imaginary numbers under certain conditions. In fact, in our sample many funds got imaginary numbers for the ASSR. Thus, we propose a new measure that does not have to deal with imaginary numbers, but maintains the main features of the original measure of Koekebakker and Zakamouline. We use the new measure to rank Brazilian Fixed Income and Multimarkets funds. Results show a very low ranking correlation between the new measure and the Sharpe Ratio, suggesting that skewness is an important issue when analyzing Brazilian mutual funds.

Keywords: Sharpe Ratio, Skewness, Performance Evaluation

JEL Classification: G11