L-performance with an application to hedge funds
AbstractThis paper introduces a new parametric fund performance measure, called the L-performance. The L-performance is an alternative to the Sharpe performance, which is commonly used in practice despite its inability to account for skewness and heavy tails of unconditional return distributions. The L-performance improves upon the Sharpe measure in this respect. Technically, it resembles the Sharpe measure in that it is defined as a ratio of the first- and second-order moments, which are the trimmed L-moments instead of the conventional (power) moments. The trimming parameters allow for focusing the L-performance on specific risk levels of interest, according to financial risk criteria. For illustration, a set of L-performances is computed for a variety of hedge funds. The empirical study shows the use of L-performance for fund ranking and return smoothing (manipulation) control.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 16 (2009)
Issue (Month): 4 (September)
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Web page: http://www.elsevier.com/locate/jempfin
Hedge fund Sharpe performance L-moment Distortion risk Measure Ranking Bias ratio Manipulation;
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