Performance Measurement of Hedge Funds Portfolios in a Downside Risk Framework

Abstract

This article starts with the recognition of the limits of a mean–variance framework to measure the performance of hedge funds, whose returns are often not normally distributed and usually asymmetric. It then introduces the literature focused on performance measurement in a downside-risk framework. The authors present both traditional and alternative performance measures, including an index of their own construction. They conclude that three well-accepted methods provide different rankings of hedge funds and, explaining the differences thus observed, suggest that the hedge fund alphas computed using their own approach are more correct.