A1 Journal article (refereed), original research
Does the Risk-Adjustment Method Matter at All in Hedge Fund Rankings?

LUT Authors / Editors

Publication Details
Authors: Pätäri Eero
Publication year: 2011
Language: English
Related Journal or Series Information: International Research Journal of Finance and Economics
Volume number: 6
Issue number: 75
Start page: 69
End page: 99
ISSN: 1450-2887
JUFO-Level of this publication:
Open Access: Open Access publication

Abstract
This paper examines the impact of the risk-adjustment method on hedge fund rankings based on a large set of both risk measures and performance measures. We contribute to the existing literature on the risk and performance measurement of hedge funds by including in comparisons many such metrics that have not been employed in hedge fund studies before. The overall results show the strong dominance of the return component over the risk component as a determinant of risk-adjusted performance. We further show that, among the set of performance measures examined, Kataoka's Safety First (KSF) measures are the most efficient in increasing the weight of the risk component as a determinant of performance. In addition, we introduce a new type of performance measure that provides close ranking approximations of mean-extended Gini-based performance measures, but is simpler to calculate for practical purposes. Interestingly, robustness tests reveal a very strong positive relationship between average rank correlation and sample size for both risk and performance measures even after the sample size-adjustment of rank correlation coefficients.

Research Areas

Last updated on 2017-22-03 at 14:51