scholarly journals The Bias Ratio As A Hedge Fund Fraud Indicator: An Empirical Performance Study Under Different Economic Conditions

2014 ◽  
Vol 13 (4) ◽  
pp. 867 ◽  
Author(s):  
Francois Van Dyk ◽  
Gary Van Vuuren ◽  
Andre Heymans
Keyword(s):  
Hedge Funds ◽  
Performance Metrics ◽  
Estimation Error ◽  
Investment Decision ◽  
Hedge Fund ◽  
Sharpe Ratio ◽  
Performance Study ◽  
Additional Information ◽  
Bias Ratio ◽  
Sharpe Ratios

The Sharpe ratio is widely used as a performance evaluation measure for traditional (i.e., long only) investment funds as well as less-conventional funds such as hedge funds. Based on mean-variance theory, the Sharpe ratio only considers the first two moments of return distributions, so hedge funds characterised by complex, asymmetric, highly-skewed returns with non-negligible higher moments may be misdiagnosed in terms of performance. The Sharpe ratio is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for augmented measures, or, in some cases, replacement fund performance metrics. Over the period January 2000 to December 2011 the monthly returns of 184 international long/short (equity) hedge funds with investment mandates that span the geographical areas of North America, Europe, and Asia were examined. This study compares results obtained using the Sharpe ratio (in which returns are assumed to be serially uncorrelated) with those obtained using a technique which does account for serial return correlation. Standard techniques for annualising Sharpe ratios, based on monthly estimators, do not account for serial return correlation this study compares Sharpe ratio results obtained using a technique which accounts for serial return correlation. In addition, this study assess whether the Bias ratio supplements the Sharpe ratio in the evaluation of hedge fund risk and thus in the investment decision-making process. The Bias and Sharpe ratios were estimated on a rolling basis to ascertain whether the Bias ratio does indeed provide useful additional information to investors to that provided solely by the Sharpe ratio.

scholarly journals Hedge Fund Performance Using Scaled Sharpe And Treynor Measures

2014 ◽  
Vol 13 (6) ◽  
pp. 1261
Author(s):  
Francois Van Dyk ◽  
Gary Van Vuuren ◽  
Andre Heymans
Keyword(s):  
Hedge Funds ◽  
Performance Metrics ◽  
Estimation Error ◽  
Investment Decision ◽  
Hedge Fund ◽  
Fund Performance ◽  
Performance Measure ◽  
Sharpe Ratio ◽  
Investment Funds ◽  
Additional Information

The Sharpe ratio is widely used as a performance measure for traditional (i.e., long only) investment funds, but because it is based on mean-variance theory, it only considers the first two moments of a return distribution. It is, therefore, not suited for evaluating funds characterised by complex, asymmetric, highly-skewed return distributions such as hedge funds. It is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for new and additional fund performance metrics. The monthly returns of 184 international long/short (equity) hedge funds from four geographical investment mandates were examined over an 11-year period.This study contributes to recent research on alternative performance measures to the Sharpe ratio and specifically assesses whether a scaled-version of the classic Sharpe ratio should augment the use of the Sharpe ratio when evaluating hedge fund risk and in the investment decision-making process. A scaled Treynor ratio is also compared to the traditional Treynor ratio. The classic and scaled versions of the Sharpe and Treynor ratios were estimated on a 36-month rolling basis to ascertain whether the scaled ratios do indeed provide useful additional information to investors to that provided solely by the classic, non-scaled ratios.

scholarly journals Hedge Fund Performance Evaluation Using The Sharpe And Omega Ratios

2014 ◽  
Vol 13 (3) ◽  
pp. 485 ◽  
Author(s):  
Francois Van Dyk ◽  
Gary Van Vuuren ◽  
Andre Heymans
Keyword(s):  
Performance Evaluation ◽  
Hedge Funds ◽  
Performance Metrics ◽  
Estimation Error ◽  
Investment Decision ◽  
Hedge Fund ◽  
Fund Performance ◽  
Sharpe Ratio ◽  
Sharpe Ratios ◽  
Omega Ratio

The Sharpe ratio is widely used as a performance evaluation measure for traditional (i.e., long only) investment funds as well as less-conventional funds such as hedge funds. Based on mean-variance theory, the Sharpe ratio only considers the first two moments of return distributions, so hedge funds characterised by asymmetric, highly-skewed returns with non-negligible higher moments may be misdiagnosed in terms of performance. The Sharpe ratio is also susceptible to manipulation and estimation error. These drawbacks have demonstrated the need for augmented measures, or, in some cases, replacement fund performance metrics. Over the period January 2000 to December 2011 the monthly returns of 184 international long/short (equity) hedge funds with geographical investment mandates spanning North America, Europe, and Asia were examined. This study compares results obtained using the Sharpe ratio (in which returns are assumed to be serially uncorrelated) with those obtained using a technique which does account for serial return correlation. Standard techniques for annualising Sharpe ratios, based on monthly estimators, do not account for this effect. In addition, this study assesses whether the Omega ratio supplements the Sharpe Ratio in the evaluation of hedge fund risk and thus in the investment decision-making process. The Omega and Sharpe ratios were estimated on a rolling basis to ascertain whether the Omega ratio does indeed provide useful additional information to investors to that provided by the Sharpe ratio alone.

scholarly journals New Evidence On Hedge Fund Performance Measures

2011 ◽  
Vol 8 (11) ◽  
Author(s):  
Komlan Sedzro
Keyword(s):  
Data Envelopment Analysis ◽  
Performance Measures ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
Sharpe Ratio ◽  
Data Envelopment ◽  
Sharpe Ratios ◽  
Hedge Fund Performance ◽  
New Evidence

Hedge funds are still relatively unfamiliar to most investors despite the intense popularity they have enjoyed in recent years. Measuring the performance of these financial instruments using traditional methods is, however, problematic, since their returns do not follow a normal distribution. In this study, we consider rankings obtained with the Stochastic Dominance (SD) method and compare them with ranks produced using Sharpe Ratios, Modified Sharpe Ratios, and Data Envelopment Analysis. We also explore the advantages highlighted by the literature of the Data Envelopment Analysis (DEA) method in relation to traditional measures like Sharpe ratio and Modified Sharpe ratio. Our results show that classic performance measures are better correlated with SD than DEA results.

Flagging potential fraudulent investment activity

2016 ◽  
Vol 23 (4) ◽  
pp. 882-901
Author(s):  
Jeremy King ◽  
Gary Wayne van Vuuren
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Sharpe Ratio ◽  
Financial Fraud ◽  
Investment Activity ◽  
Content Type ◽  
Limited Success ◽  
Bias Ratio ◽  
Return Distributions ◽  
Hedge Fund Returns

Purpose This paper aims to investigate the use of the bias ratio as a possible early indicator of financial fraud – specifically in the reporting of hedge fund returns. In the wake of the 2008-2009 financial crisis, numerous hedge funds were liquidated and several cases of financial fraud exposed. Design/methodology/approach Risk-adjusted return metrics such as the Sharpe ratio and Value at Risk were used to raise suspicion for fraud. These metrics, however, assume distributional normality and thus have had limited success with hedge fund returns (a characteristic of which is highly skewed, non-normal return distributions). Findings Results indicate that potential fraud would have been detected in the early stages of the scheme’s life. Having demonstrated the credibility of the bias ratio, it was then applied to several indices and (anonymous) South African hedge funds. The results were used to demonstrate the ratio’s scope and robustness and draw attention to other metrics which could be used in conjunction with it. Results from these multiple sources could be used to justify further investigation. Research limitations/implications The traditional metrics for performance evaluation (such as the Sharpe ratio), assume distributional normality and thus have had limited success with hedge fund returns (a characteristic of which is highly skewed, non-normal return distributions). The bias ratio, which does not rely on normally distributed returns, was applied to a known fraud case (Madoff’s Ponzi scheme). Practical implications The effectiveness of the bias ratio in demonstrating potential suspicious financial activity has been demonstrated. Originality/value The financial market has come under heightened scrutiny in the past decade (2005 – 2015) as a result of the fragile and uncertain economic milieu that still (2015) persists. Numerous risk and return measures have been used to evaluate hedge funds’ risk-adjusted performance, but many fail to account for non-normal return distributions exhibited by hedge funds. The bias ratio, however, has been demonstrated to effectively flag potentially fraudulent funds.

Hedge funds vs SEO firms: a comparative analysis

2017 ◽  
Vol 13 (1) ◽  
pp. 2-20 ◽  
Author(s):  
Robert Martin Hull ◽  
Sungkyu Kwak ◽  
Rosemary Walker
Keyword(s):  
Hedge Funds ◽  
Investment Decision ◽  
Hedge Fund ◽  
Optimal Investment ◽  
Seasoned Equity Offerings ◽  
Superior Performance ◽  
Content Type ◽  
Long Run ◽  
Portfolio Approach ◽  
Practical Implications

Purpose The purpose of this paper is to determine if hedge funds perform poorly as claimed by more recent research. The authors find hedge funds perform well from 2001 to 2013 when compared to sample of firms known to experience superior performance, namely, a sample of seasoned equity offerings (SEOs). Design/methodology/approach This paper uses a portfolio approach in comparing the performance of hedge funds and SEO firms. Other comparisons involve a number of common methodologies used to compute and analyze short-run and long-run returns. Findings Contrary to a growing and prevalent belief, the paper offers evidence hedge funds as a whole have performed well for a recent 13-year period. This finding includes periods up to six years around SEO announcement months. Research limitations/implications This paper is limited to examining monthly returns for a portfolio of hedge funds. This limitation led to incorporating a portfolio approach. Practical implications The findings suggest that a portfolio of hedge funds are an important investment consideration. This consideration has practical implications because investing in a portfolio of hedge funds has become more available for all investors in recent years. Social implications Society can be enhanced as this paper helps future investors make optimal investment decisions. Originality/value This paper adds to the hedge fund research by being the first paper to compare the performance of hedge funds with that for firms undergoing an important corporate event. The findings are new and can impact investment decision making.

Evaluating Hedge Fund Performance

2017 ◽  
Author(s):  
David M. Smith
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
Equity Market ◽  
Investment Strategies ◽  
Worst Case ◽  
Security Selection ◽  
Sharpe Ratios ◽  
Hedge Fund Performance ◽  
Fund Portfolio

A diverse set of measures allow investors to evaluate hedge fund portfolio managers’ performance across different dimensions. The various measures quantify the effectiveness of security selection; account for investor flows, operating risk, and worst-case investment scenarios; net out benchmark and peer-fund performance; and control for risk factors that are unique to hedge fund investment strategies. Hedge fund return information in published databases is usually self-reported, which is a conflict of interest that produces several reporting biases and inflated published average returns. After adjusting for these biases, hedge fund average returns trail equity market returns and in fact almost exactly equal U.S. Treasury bill average returns between January 1994 and March 2016. Yet, after risk adjustment, the hedge fund performance picture brightens. In the aggregate, hedge funds have higher Sharpe ratios and multifactor alphas, and lower maximum drawdown levels than equity market benchmarks.

scholarly journals An Omega Ratio Analysis Of Global Hedge Fund Returns

2017 ◽  
Vol 33 (3) ◽  
pp. 565-586
Author(s):  
James Rambo ◽  
Gary Van Vuuren
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Short Selling ◽  
Sharpe Ratio ◽  
Ratio Analysis ◽  
Return Distribution ◽  
The Past ◽  
Omega Ratio ◽  
Fund Investment ◽  
Hedge Fund Returns

Hedge funds are notorious for being opaque investment vehicles, operating beyond regulation and out of reach of the average investor. In the past decade, however, they have become increasingly accessible to industry and investors. Hedge fund investment vehicles have become more complex with disparate strategies employed to obtain hedged returns. With this added complexity and impenetrability of managerial tactics, investors need a robust means of distinguishing 'good' funds from 'bad'. The most commonly used ratio to do this is the Sharpe ratio, but hedge funds exhibit non-normal returns because of their use of derivatives, short selling and leverage. The Omega ratio accounts for all moments of the return distribution and in this article, it is used to rank fund returns and compare results obtained with those obtained from the Sharpe ratio over an expansionary period (2001 to 2007) and a period of economic difficulty (2008 to 2013). The Omega ratio is found to provide far superior rankings. 

Die Investition in Fine Wine unter Diversifikations- und Kostengesichtspunkten

2018 ◽  
Author(s):  
Thomas Nahmer
Keyword(s):  
Sharpe Ratio ◽  
Government Bond ◽  
Bond Index ◽  
World Government ◽  
Us Dollar ◽  
Sharpe Ratios

Dieses Papier untersucht die Sinnhaftigkeit von Fine Wine als Alternatives Investment unter besonderer Berücksichtigung der Kosten eines Fine Wine Investments. Ist Fine Wine zur weiteren Diversifizierung und damit zur Verbesserung des Risikio-Return-Profils von global in Aktien und Anleihen investierenden Portfolios geeignet? Die Analyse erfolgt in einem ersten Schritt auf Indexbasis und in einem zweiten Schritt auf Basis von realen Investitions-möglichkeiten. Die Referenzwährungen sind der US-Dollar und der Euro. Für die Indexbetrachtung werden auf der Aktienseite der MSCI-World-Index und für die Anleihen der JPM-World-Government-Bond-Index verwendet. Bei den Daten für die Investition in Fine Wine liegt der Fokus auf dem Liv-ex-50-Index der im Jahre 1999 gegründeten Londoner Weinbörse Liv-ex. Bei der realen Investition werden für die Datenanalyse bei Aktien und Anleihen Indexfonds verwendet. Da es für die Investition in Fine Wine keinen Indexfonds gibt, wird der Liv-ex-50-Index inklusive aller Kosten einer realen Investition berechnet. Es werden verschiedene Portfoliozusammensetzungen verglichen. Zum einen wird ein Portfolio aus 50% Aktien und 50% Anleihen einem Portfolio aus 45% Aktien, 45% Anleihen und 10% Fine Wine gegenübergestellt. Zum an-deren wird ein Portfolio aus 25% Aktien und 75% Anleihen gegen ein Portfolio aus 20% Aktien, 70% Anleihen und 10% Fine Wine gemessen. Als Vergleichsmaßstab werden die annualisierte Rendite, die Standardabweichung sowie das Sharpe-Ratio der jeweiligen Portfolios berechnet. Die Ergebnisse für die genannten Zeiträume sind ernüchternd. Die Beimischung von Fine Wine führt auf Indexebene lediglich zu einer leichten Verbesserung der annualisierten Rendite aber zu einer markanten Erhöhung des Risi-kos. Bei der Betrachtung der realen Investition kommen die hohen Kosten eines Investments in Fine Wine zum Tragen. Die annualisierte Rendite ist im Vergleich zu den Portfolios ohne Beimischung von Fine Wine niedriger bei gleichzeitig höheren Risikowerten. Lediglich bei der Betrachtung auf Indexbasis in Euro kann bei einem Portfolio eine leichte Verbesserung der Sharpe-Ratio verzeichnet werden. Bei der Betrachtung nach Kosten führt in allen Fällen die Beimischung von Fine Wine zu einer Verschlechterung der Sharpe-Ratios.

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