If you are going to use some set of risk-reward measures (such as Sharpe Ratio) to judge investment performance, you need to keep your eyes on the prize: The overall performance of your portfolio, not that of the individual portfolio components.
Comparing a hedge fund manager to a random version of him or herself is a great alternative to index benchmarking. I introduce my random portfolio generator, show you how it works, and provide the code.
The Markowitz Bullet underlies the best-known and most widely-used portfolio optimization approach. We provide a guided tour using a 3-asset portfolio.
We show how manager diversification improves confidence in predicting future hedge fund returns and can be used as a substitute for demanding long track records.
Hedge fund return predictability depends on having a long track record to analyze. How long is long enough? You won’t like the answer.