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

The Sharpe ratio is adequate for evaluating investment funds when the returns ofthose funds are normally distributed and the investor intends to place all his risky assetsinto just one investment fund. Hedge fund returns differ significantly from anormal distribution. For this reason, other performance measures for hedge fund returnshave been proposed in both the academic and practice-oriented literature. Inconducting an empirical study based on return data of 2,763 hedge funds, we comparethe Sharpe ratio with 12 other performance measures. Despite significant deviationsof hedge fund returns from a normal distribution, our comparison of the Sharperatio to the other performance measures results in virtually identical rank orderingacross hedge funds.