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Omega Ratio, Sharpe Ratio, Hedge Funds, Performance
Hedge funds are notorious for being opaque investment vehicles, operating beyond regulation and out of reach of the average investor. In the past decade, however, they have become increasingly accessible to industry and investors. Hedge fund investment vehicles have become more complex with disparate strategies employed to obtain hedged returns. With this added complexity and impenetrability of managerial tactics, investors need a robust means of distinguishing 'good' funds from 'bad'. The most commonly used ratio to do this is the Sharpe ratio, but hedge funds exhibit non-normal returns because of their use of derivatives, short selling and leverage. The Omega ratio accounts for all moments of the return distribution and in this article, it is used to rank fund returns and compare results obtained with those obtained from the Sharpe ratio over an expansionary period (2001 to 2007) and a period of economic difficulty (2008 to 2013). The Omega ratio is found to provide far superior rankings.