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RESEARCH PRODUCT

The Choice of Performance Measure Does Influence the Evaluation of Hedge Funds

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It is widely accepted that, when return distributions are non-normal, the use of the Sharpe ratio can lead to misleading conclusions. It is well documented that deviations of hedge fund return distributions from normality are statistically significant. The literature on performance evaluation that takes into account the non-normality of return distributions is a vast one. However, there is another stream of research that advocates that the choice of performance measure does not influence the evaluation of hedge funds. For example, Eling and Schuhmacher (2007) and Eling (2008) performed empirical studies and, judging by the values of rank correlations, concluded that the choice of performance measure is irrelevant. The goal of this paper is to explain the reasons for extremely high positive rank correlations in the above cited studies and reassert the reader that the choice of performance measure does influence the evaluation of hedge funds.