| The most widely used risk-adjusted performance measure (Sharpe ratio) assumes normally distributed returns however, the rise in popularity in hedge funds has enticed researchers to search for a risk-adjusted performance measure that is more suited for non-normally distributed hedge fund returns. This thesis critically evaluates the strengths and weaknesses of the commonly-used traditional performance measures (e.g., Sharpe ratio and alpha), and more recent risk-adjusted performance measures (e.g., Omega) of a hedge fund. I highlight the findings of others, and conclude traditional risk-adjusted performance measures are not suitable for analyzing the performance of hedge funds. Future hedge fund research should continue to explore newer alternative measures such as Omega, and practitioners should gradually abandon the traditional Sharpe ratio. |
