Does the Choice of Performance Measure Influence the Evaluation of Hedge Funds?

20 Pages Posted: 10 Nov 2006

See all articles by Martin Eling

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

Frank Schuhmacher

University of Applied Sciences and Technology Aachen (RWTH Aachen)

Abstract

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.

Keywords: Asset management; Hedge funds, Performance measurement, Rank correlation, Sharpe ratio

JEL Classification: D81, G10, G11, G23

Suggested Citation

Eling, Martin and Schuhmacher, Frank, Does the Choice of Performance Measure Influence the Evaluation of Hedge Funds?. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=943777

Martin Eling (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Frank Schuhmacher

University of Applied Sciences and Technology Aachen (RWTH Aachen) ( email )

Templegraben 64
Aachen
Germany

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