the sharp ratio has been discredited. Consider: Janus Twenty, had an attractive Sharpe ratio on December 31, 1999, of 1.47 based on three-year historical returns. Janus Twenty lost 32 percent in 2000, 29 percent in 2001, and 24 percent this year through the end of September, for a cumulative loss of 65 percent.
I don't think this proves that Sharpe ratio (or any other measurement of risk for that matter) is useless or is discredited. Only that past performance is no guarantee of future returns.
I was browsing through this website and looking at those hundreds of funds with net positive annualized return since inception. Now the silly question: if the hedge fund arena is so competitive and most funds are still showing a profit, where is all this money coming from?
What you are seeing sucker is a 'skewed' or 'biased' sample that is not taking into account the fallen. Survivorship bias I believe it is labeled by many...
By the way, I could not find the so famous Quantum fund by George Soros, and also other funds by superstars. Where are they?
correct me if i'm wrong but i think that was a list of managed futures funds (CTA's), not a list of hedge funds. many if not all of the hedgie bigs (Soros et al) were missing from that list. one quibble I have with Sharpe is that I believe it penalizes upside volatility as well as downside, which seems a little myopic to me. from my perspective it makes complete sense to kick in the turbo once you have a cushion of profit backing you up- the best way to turn a good year into a great year while preserving your initial base.
I've heard estimates of 5000 or more hedge funds in existence, so the 350 or so at Iasg.com are just a fraction of them. And the managers at Iasg tend to be 1) CTA's, 2) open to new investors, 3) targetting individuals instead of institutions, and 4) US managers. Soros and his restructured Quantum Endowment Fund doesn't fit this demographic.
Yep, this is why you have to understand the manager's strategy and really have a grasp on their abilities in relation to how the markets really work before giving up your hard earned cash- to protect yourself against the risk that you are backing a one trick pony who has been exploiting a long run anomaly that could come to a sudden stop at any point. Of course, most mutual fund investors think Sharpe is a magic marker of some kind.
Darkhorse if you would not mind can you briefly explain to me how Sharpe 'penalizes' upside/downside volatility? I am not all that familiar with "sharpes" actual function or use as a measuring tool...
Or maybe anonymity is part of their (marketing) strategy. Which is the difference between a CTA, as related to hedge funds, and a CPO?