Applying and Comparing Sharpe Style Analysis Versus a Rolling Methodology of Monthly Returns of Long/Short Funds, Market Neutral Funds, Event – Driven Hedge Funds and Their Related Indices

This article examines the application of the Sharpe style analysis versus a rolling methodology of monthly returns of long/short funds, market neutral funds, event – driven hedge funds and their related indices. The Sharpe ratio is calculated as the ratio of the excess return divided by the standard deviation or the total risk of the category. The excess return is the average return of the category minus the UK 3-month risk-free rate. High values of the Sharpe ratio are an indication of a skillful manager that adds value in terms of better performance persistence of the hedge fund. In contrast, low values of the Sharpe ratio are an indication of a manager that shows low performance and no value in terms of investment ability. On the other hand, the term rolling methodology means that the third year includes the first, second and third years and the fifth year includes all the previous years of monthly returns of hedge funds. Positive returns indicate a skilful manager that adds value to the fund. In contrast, negative returns are a sign of bad hedge fund performance