As we learned from Ranjan Bhaduri in a post last week, the non-normal qualities of managed future returns and their low correlation with traditional stock/bond portfolios means that traditional measures such as the Sharpe ratio should be viewed with some suspicion.

While this makes intuitive sense (and certainly seems to be correct when applied to managed futures), other research has suggested that even in cases of non-normality, the old-fashioned Sharpe ratio performs pretty well as a ranking system.  Regular readers will remember this post about a research study by Martin Eling of the University of St. Gallen and Frank Schuhmacher of the University of Applied Sciences and Technology Aachen.  Eling and Schuhmacher found that:

“Despite significant deviations of hedge fund returns from a normal distribution, our comparison of the Sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds.”

So much for the Sharpe ratio then, eh?  Well, not so fast…

A study this year by Valeri Zakamouline of the University of Agder in Norway asserts that “the choice of performance measure does influence the evaluation of hedge funds.” (our emphasis)

In fact, contrary to Eling and Schuhmacher, Zakamouline finds that: More…