The hedge fund metric that cried wolf
May 20th, 2007 | Filed under: Alternative Beta & Hedge Fund Replication, Performance, Analytics & MetricsOur previous posting on kurtosis seems to have generated considerable interest. Who knew that ‘fat tails’ could be so popular?
One reader who contacted us was William Shadwick, founder of Omega Analysis, a quantitative research firm based on London. Bill is known to many as the developer of the Omega Ratio. And along with co-author Ana Cascon, he recently won the Investment Management Consultants Association’s Journalism Award for his paper on new methods of calculating tail risk (the paper first appeared in the Journal of Investment Consulting’s Spring 2006 edition). Unfortunately, the paper is only available to JOIC subscribers. But Bill has allowed us to host Omega Analysis’ Primer on tail risk analysis here and also spent some time on the phone with me last week to further explain his ideas.
The document introduces a new statistic Shadwick calls the C-S Character of a distribution. He says this measure is vastly superior to kurtosis in dealing with the sort of data sets available from hedge fund managers.
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
I understand the benefits of the Omega - its complete information retention and very smooth theoretical application in decision theory with preferences at return levels - but mean/variance/skew/kurtosis all have very nice and intuitive visualizations, whereas Omega is somewhat harder to explain or target. I recently discussed how you can weight an investor’s types of risk preferences with mean/variance/skew/kurtosis/percentile worst loss to determine “best invesments,” something that Omega unfortunately cannot do so well.
[…] Regular readers may remember the name William Shadwick (see related posting). Widely known as the developer of the Omega Function and Omega Metrics®, Shadwick won the 2007 Journalism Award of the Investment Management Consultants Association ,jointly with Ana Cascon, for a paper in which they lifted the veil on some of their powerful new statistics for finance. A prominent mathematician, he was responsible for establishing the Fields Institute for Research in Mathematical Sciences before entering the finance industry in 1998. He is the founder of Omega Analysis, a quantitative research firm in London. […]