A Three-Stage Evaluation of Hedge Fund Performance

In this paper, I evaluate the performance of 955 hedge funds for the period January 2002 to December 2011, with use of four performance measures: the Sharpe ratio, Sortino ratio, Omega ratio and Jensen’s alpha. The study is carried out in three stages. First, I assess whether hedge funds outperform the market, as proxied by the S&P 500. All performance measures suggest that approximately 84% of the hedge funds outperform the benchmark. The second stage investigates how the choice of performance measures impacts hedge fund rankings. While the different ratio’s exhibit extremely high rank correlations mutually, they show lower rank correlation with Jensen’s alpha. This deviates from previous work, though it is shown that the results are severely influenced by the choice of the sample period. In the third stage I determine significant performance persistency with use of two non-parametric tests. This means that some predictive power with regards to a fund’s future performance is present.