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Hedge Funds Performance Ratios Adjusted to Market Liquidity Risk




Market liquidity is complex to measure empirically. This explains why there is no consensus about performance ratios adjusted to its risk. We summarize market liquidity by two major characteristics: a costly one because of the loss of the illiquidity premium; and a profitable one when investors can withdraw when they want. In this paper, three new performance indicators are proposed to integrate, to a certain extent, market liquidity risk, especially for hedge funds investment: liquidity-loss ratio will capture the cost characteristic whereas liquidity-Sharpe ratio and liquidity-profit ratio will represent the profitable alternative. These new ratios try to be simple and precise enough to help investors choose between hedge funds strategies according to their liquidity profile: do they want to capture illiquidity risk premium, or do they want to be free to withdraw?

Suggested Citation

  • Clauss, Pierre, 2011. "Hedge Funds Performance Ratios Adjusted to Market Liquidity Risk," Journal of Financial Transformation, Capco Institute, vol. 31, pages 133-139.
  • Handle: RePEc:ris:jofitr:1454

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    More about this item


    Market liquidity risk; Hedge funds; Sharpe ratio; Information ratio; Kalman Filter; Momentum.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions


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