Reward-to-risk ratios of funds of hedge funds

Abstract

This chapter examines whether the fund of hedge fund portfolios dominate the U.S. equity and bond markets based on alternative measures of reward-to-risk ratios. Standard deviation is used to measure total risk and both nonparametric and parametric value-at-risk is used to measure downside risk when the reward-to-risk ratios are constructed. We find that the fund of funds index has higher reward-to-risk ratios compared to several stock and bond market indices. This result is especially strong when the risk measures are calculated from the most recent year’s data and is robust as the measurement window is extended to four years.