Comments on: Alternative Viewpoints: Due to funds’ lack of persistence, the Sharpe ratio has no validity as an investment decision tool http://allaboutalpha.com/blog/2009/10/29/alternative-viewpoints-due-to-funds%e2%80%99-lack-of-persistence-the-sharpe-ratio-has-no-validity-as-an-investment-decision-tool/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Fri, 19 Mar 2010 07:52:26 +0000 http://wordpress.org/?v=abc hourly 1 By: Ranjan Bhaduri http://allaboutalpha.com/blog/2009/10/29/alternative-viewpoints-due-to-funds%e2%80%99-lack-of-persistence-the-sharpe-ratio-has-no-validity-as-an-investment-decision-tool/comment-page-1/#comment-215508 Ranjan Bhaduri Mon, 02 Nov 2009 05:47:28 +0000 http://allaboutalpha.com/blog/?p=7131#comment-215508 Nice post. Yes, the Sharpe Ratio is not at all stable. Dr. Galen Burghardt et al, also proved this in a paper (http://www.intercontilimited.com/mfutsarchive/correlation_duration.pdf). It's reckless and not prudent to use the Sharpe Ratio as an important metric given that it's not stable, doesn't take into account the higher statistical moments, that it can be gamed by smoothing for illiquid hedge funds, and that it penalizes for upside volatility. Nice post. Yes, the Sharpe Ratio is not at all stable. Dr. Galen Burghardt et al, also proved this in a paper (http://www.intercontilimited.com/mfutsarchive/correlation_duration.pdf). It’s reckless and not prudent to use the Sharpe Ratio as an important metric given that it’s not stable, doesn’t take into account the higher statistical moments, that it can be gamed by smoothing for illiquid hedge funds, and that it penalizes for upside volatility.

]]> By: Peter Urbani http://allaboutalpha.com/blog/2009/10/29/alternative-viewpoints-due-to-funds%e2%80%99-lack-of-persistence-the-sharpe-ratio-has-no-validity-as-an-investment-decision-tool/comment-page-1/#comment-214290 Peter Urbani Fri, 30 Oct 2009 01:18:56 +0000 http://allaboutalpha.com/blog/?p=7131#comment-214290 We find similar results in this study http://www.infiniti-analytics.com/kb/kb/article/infinitisfascorearapm Interestingly we find that the Sortino ratio does worse than expected due to the fact that, because of the high quality of the 36 underlying funds, it is possible for the computer to find a set of weights that gives an in in-sample portfolio with no downside deviation. When we repeat the study using Indices instead of individual funds the Sortino ratio out-performs the Sharpe ratio. We find similar results in this study http://www.infiniti-analytics.com/kb/kb/article/infinitisfascorearapm

Interestingly we find that the Sortino ratio does worse than expected due to the fact that, because of the high quality of the 36 underlying funds, it is possible for the computer to find a set of weights that gives an in in-sample portfolio with no downside deviation. When we repeat the study using Indices instead of individual funds the Sortino ratio out-performs the Sharpe ratio.

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