Methodology of measuring performance in alternative investment

Alexis Bonnet () and Isabelle Nagot
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Alexis Bonnet: Methodology Group, London et CERMSEM

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

Abstract: The development of alternative investment has highlighted the limitations of standard performance measures like the Sharpe ratio, primarily because alternative strategies yield returns distributions which can be far from gaussian. In this paper, we propose a new framework in which trades, portfolios or strategies of various types can be analysed regardless of assumptions on payoff. The proposed class of measures is derived from natural and simple properties of the asset allocation. We establish representation results which allow us to describe our set of measures and involve the log-Laplace transform of the asset distribution. These measures include as particular cases the squared Sharpe ratio, Stutzer's rank ordering index and Hodges' Generalised Sharpe Ratio. Any measure is shown to be proportional to the squared Sharpe ratio for gaussian distributions. For non gaussian distributions, asymmetry and fat tails are taken into account. More precisely, the risk preferences are separated into gaussian and non-gaussian risk aversions

Keywords: Alternative investment; performance measure; additive independence condition; generalised Sharpe ratio; portfolio optimization (search for similar items in EconPapers)
JEL-codes: C65 G11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005-10
New Economics Papers: this item is included in nep-fin and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:b05078

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