L-Performance with an Application to Hedge Funds

L-Performance with an Application to Hedge Funds This paper introduces a new fund performance measure, called the L-performance. It is proposed as an alternative to the Sharpe performance mea-sure that is commonly used for fund performance valuation despite its inability to account for the skewness and thick tails of fund return distributions. The L-performance improves upon the Sharpe measure in this respect. Technically, the L-performance is based on sample statistics, called L-moments, which are conceptually close to the conventional power moments, but provide more de-tailed information about the extremes. For this reason, the L-moments are used for prediction and assessment of extreme events, such as floods and earth-quakes. In this paper, the new L-performance measure is calculated for a variety of hedge funds and is used to derive a fund ranking