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Robust evidence on the similarity of Sharpe ratio and drawdown-based hedge fund performance rankings

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  • Auer, Benjamin R.
  • Schuhmacher, Frank

Abstract

In this article, we analyse whether the class of adequately defined drawdown-based performance measures produces hedge fund rankings similar to the one that can be obtained using the Sharpe ratio. Supported by a series of robustness checks, we find that the choice of performance measure does not matter if investors are simply interested in identifying the best hedge funds and if a sufficient return history is used to calculate performance measure estimates. In small time series sample sizes typically used to evaluate hedge funds, the rankings cannot be regarded as strictly identical. However, with an increasing time series dimension, the ranking differences fall considerably.

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  • Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Robust evidence on the similarity of Sharpe ratio and drawdown-based hedge fund performance rankings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 153-165.
    • Handle: RePEc:eee:intfin:v:24:y:2013:i:c:p:153-165
    DOI: 10.1016/j.intfin.2012.11.010
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    Citations

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    Cited by:

    1. Damien Challet, 2017. "Sharper asset ranking from total drawdown durations," Applied Mathematical Finance, Taylor & Francis Journals, vol. 24(1), pages 1-22, January.
    2. Benjamin R Auer, 2016. "Pure return persistence, Hurst exponents and hedge fund selection – A practical note," Journal of Asset Management, Palgrave Macmillan, vol. 17(5), pages 319-330, September.
    3. Noureddine Kouaissah & Sergio Ortobelli Lozza & Ikram Jebabli, 2022. "Portfolio Selection Using Multivariate Semiparametric Estimators and a Copula PCA-Based Approach," Computational Economics, Springer;Society for Computational Economics, vol. 60(3), pages 833-859, October.
    4. Amer M. Bakhach & Edward P.K. Tsang & V.L. Raju Chinthalapati, 2018. "TSFDC: A trading strategy based on forecasting directional change," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 25(3), pages 105-123, July.
    5. Noureddine Kouaissah & Amin Hocine, 2021. "Forecasting systemic risk in portfolio selection: The role of technical trading rules," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(4), pages 708-729, July.
    6. Kouaissah, Noureddine, 2023. "Robust reward-risk performance measures with weakly second-order stochastic dominance constraints," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 53-62.
    7. Zhang, Hanxiong & Auer, Benjamin R. & Vortelinos, Dimitrios I., 2018. "Performance ranking (dis)similarities in commodity markets," Global Finance Journal, Elsevier, vol. 35(C), pages 115-137.
    8. Kouaissah, Noureddine, 2021. "Using multivariate stochastic dominance to enhance portfolio selection and warn of financial crises," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 480-493.
    9. Auer, Benjamin R., 2015. "Does the choice of performance measure influence the evaluation of commodity investments?," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 142-150.
    10. Schuhmacher, Frank & Auer, Benjamin R., 2014. "Sufficient conditions under which SSD- and MR-efficient sets are identical," European Journal of Operational Research, Elsevier, vol. 239(3), pages 756-763.
    11. Valadkhani, Abbas & Moradi-Motlagh, Amir, 2023. "An empirical analysis of exchange-traded funds in the US," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 995-1009.
    12. Auer, Benjamin R., 2016. "On the performance of simple trading rules derived from the fractal dynamics of gold and silver price fluctuations," Finance Research Letters, Elsevier, vol. 16(C), pages 255-267.
    13. Korn, Olaf & Möller, Philipp M. & Schwehm, Christian, 2019. "Drawdown measures: Are they all the same?," CFR Working Papers 19-04, University of Cologne, Centre for Financial Research (CFR).
    14. Benjamin R. Auer & Tobias Hiller, 2015. "On the evaluation of soccer players: a comparison of a new game-theoretical approach to classic performance measures," Applied Economics Letters, Taylor & Francis Journals, vol. 22(14), pages 1100-1107, September.
    15. Strobel, Marcus & Auer, Benjamin R., 2018. "Does the predictive power of variable moving average rules vanish over time and can we explain such tendencies?," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 168-184.

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    More about this item

    Keywords

    Drawdowns; Hedge funds; Sharpe ratio; Performance measurement; Ranking;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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