Optimized drawdown risk in evaluating the performance of Malaysian mutual funds

Purpose – This paper aims to evaluate the risk‐adjusted performance of Malaysian mutual funds using optimized drawdown risk measures (ODRMs) based on modern portfolio theory, and to represent the results in a manner which is easily understood by average investors and portfolio managers. Design/methodology/approach – This study evaluates the performance of 70 Malaysian mutual funds using risk‐adjusted returns during 2000‐2011. The ODRM is primarily calculated by 70 linear programming models, consequently seven new optimized risk‐adjusted performance measures including Sharpe, Treynor, M‐squared, Jensen's alpha, information ratio (IR), MSR, and FPI are proposed to evaluate these funds. Findings – The results of this study have several implications. First, the ODRM can be an alternative risk measure to optimize the selection of mutual funds. Second, it proposes new seven optimized performance measures of Sharpe, Treynor, M‐square, Jensen's alpha, IR, MSR, and FPI. These measures help fund managers to evaluate the performance of Malaysian mutual funds optimally. Third, No‐Islamic funds have the upper performance than Islamic funds based on the results of optimized measures and robustness tests. Fourth, the majority of surveying funds over‐perform the benchmark indexes. Practical implications – The research evidence reported by this study can be utilized as input in the process of decision making by small and average investors and portfolio managers who are seeking the possibility of participating in Malaysian stock market by mutual funds. Originality/value – This paper is the first study that optimizes the drawdown risk measure to evaluate the performance of Malaysian mutual funds and propose seven optimized measures, Sharpe, Treynor, M‐Square, Jensen's alpha, IR, MSR, and FPI.