A.I.R.A.P. - Alternative Rapms for Alternative Investments

33 Pages Posted: 29 Nov 2003

See all articles by Milind Sharma

Milind Sharma

QuantZ Capital Management LLC

Date Written: December 2003

Abstract

This paper highlights the inadequacies of traditional RAPMs (Risk-Adjusted Performance Measures) and proposes AIRAP (Alternative Investments Risk Adjusted Performance), based on Expected Utility theory, as a RAPM better suited to Alternative Investments. AIRAP is the implied certain return that a risk-averse investor would trade off for holding risky assets. AIRAP captures the full distribution, penalizes for volatility and leverage, is customizable by risk aversion, works with negative mean returns, eschews moment estimation or convergence requirements and can dovetail with stressed scenarios or regime-switching models. A modified Sharpe Ratio is proposed. The results are contrasted with Sharpe, Treynor and Jensen rankings to show significant divergence. Evidence of non-normality and the tradeoff between mean-variance merits vis-a-vis higher moment risks is noted. The dependence of optimal leverage on risk aversion and track record is noted. The results have implications for manager selection and fund of hedge funds portfolio construction.

Keywords: Hedge Funds, Risk Adjusted Performance, Certainty Equivalent, AIRAP

JEL Classification: D81, B23, C63, C51

Suggested Citation

Sharma, Milind, A.I.R.A.P. - Alternative Rapms for Alternative Investments (December 2003). Available at SSRN: https://ssrn.com/abstract=469703 or http://dx.doi.org/10.2139/ssrn.469703

Milind Sharma (Contact Author)

QuantZ Capital Management LLC ( email )

44 Wall St., 12th Floor
12th Floor
NY, NY 10005
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,135
Abstract Views
4,710
Rank
35,045
PlumX Metrics