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 meanvariance 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.Keywords: Hedge Funds; Bias Ratio; Fraud; Risk Management; Sharpe Ratio INTRODUCTIONnstitutional investors and wealthy individuals have for a long time been interested in hedge funds as alternative investments to traditional asset portfolios, while the public's interest in the hedge fund industry has also increased through spectacular hedge fund activities, such as the collapse of Long Term Capital Management (LTCM) in the late 1990's. Since the early 1990's, hedge funds have become an increasingly popular asset class as global investment rose from US$50bn in 1990 to US$2.2tn in early 2007 (Barclayhedge, 2013). In March 2012, long/short equity funds accounted for the largest portion -23% -of the industry by assets (Citi, 2012). The hedge fund industry posted its sturdiest gains, in terms of asset flows and performance, between 2003 to 2007 where after the financial crisis significantly curtailed growth. However, industry growth reversed, declining to US$1.4tn by April 2009 due to substantial investor redemptions and performance-based declines (Eurekahedge, 2012). In April 2013, total assets under management (AUM) for the hedge fund industry had risen to only US$1.9tn (Eurekahedge, 2013) Source: Barclayhedge (2013) Although most comparisons of hedge fund returns concentrate exclusively on total return values, comparing funds with different expec...

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.

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 meanvariance 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.Keywords: Hedge Funds; Omega Ratio; Sharpe Ratio; Risk Management INTRODUCTIONven before the advent of the first hedge fund structure by Alfred Winslow Jones in 1949 institutional investors as well as wealthy individuals have been interested in hedge funds as early as the 1920s when several private investment vehicles were available to wealthy investors. The public's interest in these funds has also increased through some extravagant hedge fund phenomena, such as the collapse of Long Term Capital Management (LTCM) 1 in the late 1990s, Amaranth Advisors 2 in 2006 and the Madoff Ponzi scheme 3 in late 2008. Since the early 1990s, hedge funds have become an increasingly popular asset class as global investment increased from US$50bn in 1990 to US$2.2tn in early 2007 (Barclayhedge, 2013). Between 2003 and 2007 the hedge fund industry posted its sturdiest gains, in terms of asset flows and performance whereafter the financial crisis significantly curtailed growth. Due to substantial investor redemptions and performance-based declines industry growth reversed, declining to US$1.4tn by April 2009(Eurekahedge, 2012. Total assets under management (AUM) 1 A large US based hedge fund that nearly caused the collapse of the global financial system in 1998 due to high-risk arbitrage bond trading strategies. The fund was highly leveraged when Russia defaulted on its debt causing a flight to quality. The fund suffered massive losses, and was ultimately bailed out with the assistance of the Federal Rese...