Performance Measurement in the Investment Industry

It is frequently noted that investment funds with a nonnormal return distributioncannot be adequately evaluated using the classic Sharpe ratio. However, recent research compared the Sharpe ratio with other performance measures and found virtually identical rank ordering using hedge fund data. We extend this research byanalyzing a large data set of 38,954 funds investing in seven different asset classes. We find that the research result is true not only for hedge funds, but alsofor mutual funds investing in stocks, bonds, and real estate, funds of hedge funds,commodity trading advisors, and commodity pool operators. This finding has serious implications for performance measurement in the investment industry: thechoice of performance measure is not critical to fund evaluation and the Sharpe ratio is generally adequate for analyzing hedge funds and mutual funds.