An Omega Ratio Analysis Of Global 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.

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Hedge Funds: Do They Do What They Say They Do?

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v8i10.769 ◽

2010 ◽

Vol 8 (10) ◽

Author(s):

Scott P. Mackey ◽

Michael R. Melton

Keyword(s):

Hedge Funds ◽

Hedge Fund ◽

Strongly Correlated ◽

Ample Evidence ◽

Investment Style ◽

Funds Of Hedge Funds ◽

Standard Linear ◽

Style Indices ◽

Fund Investment ◽

Hedge Fund Returns

The purpose of this research is two-fold, to determine if hedge funds follow their stated strategy styles and to examine how hedge funds’ strategy allocations evolve over time in response to changed economic and market conditions.  Our key advance is that we show that standard linear style models like that of Sharpe (1992) can be applied to hedge fund returns as long as the returns of the style indices in the model themselves display the nonlinear option-like characteristics of hedge fund returns.  For our research, the returns of our sample of Funds of Hedge Funds are strongly correlated to the returns of portfolios of hedge fund investment style indices.  In this way, we capture the spirit of Fung & Hsieh's (2002) Asset-Based Style Factors for Hedge Funds.  Based on our results, it appears that the answer to the first question is “somewhat”, while we find ample evidence of significant shifts in allocation among the Fund of Hedge Funds from the first sample period (1997-2001) to the second (2002-2006).  The changes in allocation appear to rationally reflect the changed economic conditions and investment opportunities existing at the time.

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Flagging potential fraudulent investment activity

Journal of Financial Crime ◽

10.1108/jfc-09-2015-0051 ◽

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.

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Hedge Fund Performance Evaluation Using The Sharpe And Omega Ratios

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v13i3.8588 ◽

2014 ◽

Vol 13 (3) ◽

pp. 485 ◽

Cited By ~ 2

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.

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Determinants of Hedge Fund Internal Controls and Fees

The Accounting Review ◽

10.2308/accr.2010.85.6.1887 ◽

2010 ◽

Vol 85 (6) ◽

pp. 1887-1919 ◽

Cited By ~ 19

Author(s):

Gavin Cassar ◽

Joseph Gerakos

Keyword(s):

Hedge Funds ◽

Agency Costs ◽

Hedge Fund ◽

Short Selling ◽

Internal Controls ◽

Fund Managers ◽

Asset Value ◽

Net Asset Value ◽

Financial Misstatements ◽

Financial Misstatement

ABSTRACT: We investigate the determinants of hedge fund internal controls and their association with the fees that funds charge investors. Hedge funds are subject to minimal regulation. Hence, hedge fund managers voluntarily implement internal controls, and managers and investors freely contract on fees. We find that internal controls are stronger in funds with higher potential agency costs. Further, internal controls are stronger in funds domiciled in jurisdictions that provide investors with limited legal redress for fraud and financial misstatements. Short selling funds, however, are more likely to protect information about their investment positions by implementing weaker internal controls. With respect to fees, we find that the percentage of positive profits that the manager receives increases in the strength of the fund’s internal controls. Finally, removing the manager from setting and reporting the fund’s official net asset value, along with reputational incentives and monitoring by leverage providers, are all associated with lower likelihoods of future regulatory investigations of fraud and/or financial misstatement.

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Hedge Fund Performance Using Scaled Sharpe And Treynor Measures

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v13i6.8920 ◽

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.

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Are hedge fund returns affected by media coverage of macroeconomic news?

Studies in Economics and Finance ◽

10.1108/sef-10-2017-0289 ◽

2019 ◽

Vol 36 (3) ◽

pp. 427-439

Author(s):

Sandip Dutta ◽

James Thorson

Keyword(s):

Hedge Funds ◽

Media Coverage ◽

Hedge Fund ◽

Real Sector ◽

Macroeconomic News ◽

Content Type ◽

Fund Managers ◽

News Announcements ◽

Hedge Fund Returns ◽

The Impact

Purpose Extant literature suggests that the difficulty associated with the interpretation of macroeconomic news announcements by the market in general in different economic environments, might be the reason why most studies do not find any significant relationship between real-sector macroeconomic variables and financial asset returns. This paper aims to use a different approach to measure macroeconomic news. The objective is to examine if a different measure of a macroeconomic news variable, constructed from media coverage of the same, significantly affects hedge fund returns. Design/methodology/approach The authors use a news index for unemployment, which is a real-sector variable, constructed from newspaper coverage of unemployment announcements and examine its impact on hedge fund returns. Findings Contrary to the other studies that examine the impact of macroeconomic news on hedge fund returns, the authors find that media coverage of unemployment news announcements significantly affects hedge fund returns. Practical implications Overall, this paper demonstrates that the manner in which the market interprets macroeconomic news announcements in different economic environments is probably a more relevant factor for hedge funds and is more likely to impact hedge fund returns. In conjunction with variables – constructed from media coverage of unemployment news announcements – that factor in the manner of interpretation, it is found that surprises also matter for hedge fund returns. This is an important consideration for hedge fund managers as well. Originality/value To the best of the authors’ knowledge, this is the first study that examines the impact of media coverage of macroeconomic news announcements on hedge fund returns and finds significantly different results with real-sector macro variables.

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MEASURING AND MONITORING THE EFFICIENCY OF MARKETS

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024917500510 ◽

2017 ◽

Vol 20 (08) ◽

pp. 1750051 ◽

Cited By ~ 14

Author(s):

DILIP B. MADAN ◽

WIM SCHOUTENS ◽

KING WANG

Keyword(s):

Market Efficiency ◽

Hedge Funds ◽

Economic Activity ◽

Hedge Fund ◽

Exchange Traded Funds ◽

Acceptability Index ◽

Hedge Fund Returns

Market efficiency is measured by arbitrage proximity. The level of efficiency is calibrated by extent of a distortion of probability required to neutralize the drift. Simulations of bilateral gamma models estimated from past returns deliver for each asset on each day an empirical acceptability index. The assets covered include equities, commodities, currencies, volatility and hedge fund returns. It is observed that efficiency in equity is related to the process for up moves having more frequent and smaller jumps than its down side counterpart. For commodities the situation is reversed. Volatility indices trade more efficiently than equities, commodities, or currencies. Hedge fund returns reflect lower levels of efficiency supportive of hedge funds effectively exploiting market inefficiences. The relative inefficiency of the absence of trading is noted on comparing close to open with open to close returns. Small capitalization stocks trade more efficiently than the large ones. Sector exchange traded funds trade more efficiently than the S&P 500 index. Furthermore, economic activity reflected in greater high low spreads enhance market efficiency.

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Hedge Fund Replication

10.1093/oso/9780190607371.003.0025 ◽

2017 ◽

Author(s):

Mikhail Tupitsyn ◽

Paul Lajbcygier

Keyword(s):

Hedge Funds ◽

Direct Investment ◽

Tracking Error ◽

Hedge Fund ◽

Cost Effective ◽

Secondary Markets ◽

Hedge Fund Replication ◽

Effective Manner ◽

Equity Indices ◽

Hedge Fund Returns

In theory, analogous to equity indices, hedge fund indices can provide broad exposure to hedge funds in a cost-effective manner. In practice, however, hedge fund indices are difficult to implement because direct investment in hedge funds is impractical. Unlike equities, hedge funds are not traded on liquid secondary markets and are often closed to new investment. A solution is hedge fund replication, which, rather than require direct investment in hedge funds, synthetically recreates hedge fund index returns by investing in portfolios that are exposed to the same underlying economic factors that drive hedge fund returns. This approach provides broad, cost-effective, hedge fund exposure and avoids the practical problems associated with direct hedge fund investment. As a consequence, such hedge fund clones exhibit lower tracking error and substantially higher raw and risk-adjusted returns than both investible and noninvestible hedge fund indices.

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Hedge Funds and Financial Misreporting

10.1093/oxfordhb/9780198840954.013.20 ◽

2021 ◽

pp. 392-418

Author(s):

Philippe Jorion

Keyword(s):

Empirical Evidence ◽

Hedge Funds ◽

Hedge Fund ◽

Compensation System ◽

Good News ◽

Regulatory Environment ◽

Due Diligence ◽

Financial Misreporting ◽

Hedge Fund Returns

The growth of the hedge fund industry can be ascribed to its performance-based incentive compensation system as well as a lighter regulatory environment. These features, however, could also potentially create more opportunities for financial misreporting and even fraud. In response, recent research has attempted to detect misreporting by using due diligence information or by examining patterns in hedge fund returns. Empirical evidence suggests that hedge fund fraud can be usefully predicted from due diligence information, especially evidence of previous misrepresentation. Predicting misreporting from hedge fund returns, however, is much more difficult. This is because returns may reflect patterns in underlying assets instead of manager manipulation. For hedge fund investors, the good news is that the accumulated body of experience about detecting misreporting should help improve the quality of hedge fund investments. In addition, newly-imposed registration requirements for hedge fund advisors should also lower occurrences of misreporting.

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New Evidence On Hedge Fund Performance Measures

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v8i11.3189 ◽

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.

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