Performance Measurement of Hedge Fund Indices - Does the Measure Matter?

A central issue in the academic debate concerning hedge funds is how the performance of such funds should be measured. The point of departure for our study is a view that is widespread in the relevant literature and which asserts that hedge funds cannot be measured applying the classic Sharpe ratio because of the atypical character of their higher return distribution moments. Instead, what is recommended is the use of newer performance measures that show the risk of loss. In conducting an empirical study based on hedge fund indices, we compare the Sharpe ratio with newer approaches to measure hedge fund performance. Although the re-turns of the hedge fund indices deviate markedly from a normal distribution, the various hedge fund strategies are ranked largely identical. We thus conclude that the choice of the performance measure has no critical influence on the evaluation of hedge fund indices.