An Alternative Performance Measure

In this paper, we present a new alternative performance measure (APM) which evaluates not only for the marginal distribution of a given fund but also its' dependence (correlation) with a reference portfolio. This performance measure is of particular value in assessing hedge fund return as the latter are selected not only for yield enhancement but also for their diversification benefits. The methodology is adapted from American option theory and based on earlier work of Dybvig (1988), Kat and Palaro (2005) and Papageorgiou et al. (2008). It offers a unique metric for hedge fund performance evaluation