Selecting a risk-adjusted shareholder performance measure

Pedersen, Claus; Rudholm-Alfvin, Ted

doi:10.1057/palgrave.jam.2240101

Cited by 73 publications

(75 citation statements)

References 31 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…2 To avoid this problem, some researchers recommend the use of newer performance measures that illustrate the risk of loss (Pedersen and Rudholm-Alfvin 2003;Lhabitant 2004).…”

mentioning

confidence: 99%

Does the Measure Matter in the Mutual Fund Industry?

Eling

2008

Financial Analysts Journal

137

104

View full text Add to dashboard Cite

he most widely known risk-adjusted performance measure is the Sharpe ratio. It measures the relationship between the risk premium (mean excess returns) and the standard deviation of the returns generated by the fund, portfolio, or asset being measured (Sharpe 1966). Hedge funds and other alternative investments, however, are prone to generating returns that have a nonnormal distribution. For this reason, Brooks and Kat (2002), Mahdavi (2004), Sharma (2004), and Sharpe (2007), among others, have claimed that these funds cannot be adequately evaluated by using the Sharpe ratio. This problem motivated the development of numerous new performance measures, including Omega, the Sortino ratio, the Calmar ratio, and the modified Sharpe ratio, all of which are currently being debated as measures of performance in the hedge fund literature (for an overview, see Lhabitant 2004).In a recent study, Eling and Schuhmacher (2007) compared these new performance measures with the Sharpe ratio by using the data of 2,763 hedge funds. Despite hedge fund returns' significant deviation from a normal distribution, the Sharpe ratio and the other measures in their study resulted in virtually identical rank ordering for the hedge funds. Eling and Schuhmacher analyzed only hedge funds, however, and thus did not consider whether this result is also true for funds investing in other asset classes.The aim of the study reported here was to address this issue. Combining two large datasets, I analyzed 38,954 investment funds concentrated in a large number of asset classes, including stocks, bonds, real estate, hedge funds, funds of hedge funds, commodity trading advisers (CTAs), and commodity pool operators (CPOs). Performance MeasuresIn risk-adjusted performance measurement, the fund return is adjusted in relation to a suitable risk measure. In investment fund analysis, the Sharpe ratio is often chosen to be the performance measure and the analyst compares the Sharpe ratio of the fund of interest with the Sharpe ratios of other funds or market indices (see, for example, Ackermann, McEnally, and Ravenscraft 1999;Schneeweis, Kazemi, and Martin 2002).In the context of hedge funds, use of the Sharpe ratio has been strongly criticized because hedge fund returns do not exhibit a normal distribution. 1For example, use of derivative instruments results in an asymmetrical return distribution, and fat tails, which leads to the danger that use of standard risk and performance measures will underestimate risk and overestimate risk-adjusted performance.2 To avoid this problem, some researchers recommend the use of newer performance measures that illustrate the risk of loss (Pedersen and Rudholm-Alfvin 2003;Lhabitant 2004).The newer performance measures differ from the Sharpe ratio in that standard deviation is replaced by an alternative risk measure. The alternative risk measures considered in this study areMartin Eling is at the University of St. Gallen, Switzerland, and currently visiting professor at the University of Wisconsin-Madison.

show abstract

“…2 To avoid this problem, some researchers recommend the use of newer performance measures that illustrate the risk of loss (Pedersen and Rudholm-Alfvin 2003;Lhabitant 2004).…”

mentioning

confidence: 99%

Does the Measure Matter in the Mutual Fund Industry?

Eling

2008

Financial Analysts Journal

137

104

View full text Add to dashboard Cite

show abstract

“…More recently, Pedersen and Rudholm-Alfvin (2003) confirmed that the Sortino ratio is more applicable when a return distribution is not normality distributed and it can capture some of the asymmetric risk that is not captured by Sharpe ratio. Plantinga and de Groot (2001) also argued the importance of the relationship between performance measures and preference functions.…”

Section: Literature Reviewmentioning

confidence: 96%

Momentum Profits in Australian Listed Property Trusts

Lee

Reed

Robinson

2007

Pacific Rim Property Research Journal

View full text Add to dashboard Cite

show abstract

“…It is extended by practitioners who do not base their work on theoretical considerations. Most of the prior literature on the DRM are found in journals outside of finance (that is, Petroni and Rotundu, 2008), non-refereed finance journals (that is, Burke, 1994;Kestner, 1996) and finance journals geared to investment community (Pedersen and Alfvin, 2003;Hamelink and Hoesli, 2004;Magdon-Ismail et al, 2004;Sharma, 2004;Chekhlov et al, 2005;Ammann and Moerth, 2008;Cogneau and Hübner, 2009). However, this measure has been applied to finance literature recently as a new risk measure ( that is, Tashman and Frey, 2009;Tavakoli Baghdadabad et al, 2011, 2012.…”

Section: Drm and The Relation To Lower Partial Moment (Lpm)mentioning

confidence: 99%

The effects of drawdown risk reduction on the US hedge funds

Baghdadabad

2013

J Deriv Hedge Funds

View full text Add to dashboard Cite

We investigate the effects of drawdown risk reduction on the US hedge funds. Despite the existence of numerous evidences on the asymmetric distribution of portfolio returns, the asymmetric risk measures have been extensively applied in risk management during recent years with the considerable applications on the lower partial moment (LPM) methodology. Unlike prior literatures, we use the drawdown risk measure (DRM), which is a special case of LPM, to study the impacts of drawdown risk decrease on management styles of the US hedge funds. The monthly returns are applied for 1720 US hedge funds over the period [2000][2001][2002][2003][2004][2005][2006][2007][2008][2009][2010][2011]. The optimization models in the DRM form are run to optimize the risk measures and investigate the effects of drawdown risk reduction. We find that the potential benefits of funds' diversification may weaken decreases in tolerance levels of drawdown risk. Our findings increase the importance of risk (tolerance) perception, in particular drawdown risk, when making many investment decisions. We find that it can negatively affect portfolio returns. Our findings also show that skewness does not impose any significant problem in the DRM model. The DRM optimization model reduces investors' risk more than the conventional models and can be accommodated with risk-averse investors' approach.

show abstract

Selecting a risk-adjusted shareholder performance measure

Cited by 73 publications

References 31 publications

Does the Measure Matter in the Mutual Fund Industry?

Does the Measure Matter in the Mutual Fund Industry?

Momentum Profits in Australian Listed Property Trusts

The effects of drawdown risk reduction on the US hedge funds

Contact Info

Product

Resources

About