This is what I read.
Hedge funds have higher abosolute and risk-adjusted return than stocks and bonds.
Sharpe ratio is higher than equity but lower than bonds.
How can it earn higher risk-adjusted return than bonds if it has lower sharpe ratio than bonds?
I didn’t read anything like this. I rather see a mention in the curriculum that statistics over a given period of time were showing that hedge funds had higher risk-adjusted returns, and it referred to the sharpe ratio being higher.
I don’t know where you have this information from but risk-adjusted return is a more judgemental measure I believe, because you have different ways of computing it (depending on what you take as a measure of risk)
Maybe that explains the info you found
Sachin - are you referring to exhibit 22 and 23 in CFAI text reading 25 on hedge funds.
Please note that they are referring to 2 different time series.
Otherwise, I haven’t seen anything like this.
Also note that Sharpe ratio is not recommended measure of risk-adjusted performance for hedge funds due to skewness and kurtosis as highlighted in the text.
My mistake. This is what I read in schweser.
Hedge funds generated higher absolute and risk-adjusted returns than stocks and bonds over the period 1990-2004.
For the more recent period, the mean return and Sharpe ratio is higher than the measures for stocks, but they are both lower than the measures for bonds.
Is my conclusion correct for sharp ratio relationship below? I do understand its not right measure but still for the comparison.
stock < hedge funds < bonds
Yes for more recent data (2000 -2004)- Sharpe ratio = stock < hedge funds < bonds.
Please check exhibit 23 in CFAI reading 25.
Thank you all!
I am good now.