Paper
Journal of Derivatives & Hedge Funds (2008) 14, 42–49. doi:10.1057/jdhf.2008.5
Do asymmetric risk metrics influence performance persistence?
Practical applications
This paper is useful for investors and managers of money market funds since it tries to identify the true performance of these portfolios. The empirical results indicate incorrect performance valuations of Spanish funds when classical measures are considered. Two problems are detected: (1) asymmetric fund return distributions; (2) negative return premia. This latter feature is observed as the main reason that leads to the incoherent performance valuations. Hence, this paper provides the application of alternative performance measures to reach coherent performance rankings, very useful information for investors to evaluate the management of each fund and for fund managers to know their relative position in the market. Moreover, higher levels of performance persistence are found when alternative performance measures are applied, an interesting added value to investors when choosing a money market fund.
Luis Ferruz1, José Luis Sarto2 and Laura Andreu3
Correspondence: Luis Ferruz, Department of Accounting and Finance, Faculty of Economics and Business Studies, University of Zaragoza, C/Gran Vía 2, 50005-Zaragoza, Spain. Tel: +34 976 762494; Fax: +34 976 761791; E-mail: lferruz@unizar.es
1Luis Ferruz is Full Professor of Finance at the University of Zaragoza (Spain) and director of the research group GIECOFIN. He has published a large number of papers in journals such as Omega, Journal of Asset Management, Applied Economic Letters and Geneva Papers, and others. His research interests include portfolio management, performance persistence and style analysis in investment funds and corporate finance.
2José Luis Sarto is Senior Lecturer at the University of Zaragoza. He has published a large number of papers in journals such as Omega, Journal of Asset Management, Applied Economic Letters and Applied Financial Economic Letters, and others. His research interests include behavioural finance and portfolio management.
3Laura Andreu is Junior Lecturer at the University of Zaragoza. Her research interests include portfolio management, behavioural finance and pension funds performance. At the moment she is working on her PhD on the subject of the financial analysis of Spanish pension funds.
Received 4 March 2008; Revised 4 March 2008.
Abstract
This paper examines the influence of downside risk metrics when it comes to evaluating the performance persistence of Spanish money market funds. We present findings of important subsets of funds that show significant asymmetric return distributions; thus by taking alternative risk measures into account, such as semi-standard deviation and absolute deviation, we try to provide more appropriate performance rankings than those obtained with classic indices. We then adjust the performance indices used, given that significant subsets of funds with negative return premiums are found. The results provide strong evidence of markedly different rankings when considering adjusted performance measurements to avoid the effect of negative return premiums. Similar rankings, however, are achieved once the aforementioned effect is corrected, regardless of applying symmetric or asymmetric measures. Finally, a more accused empirical evidence of performance persistence using Cochran's test is observed in asymmetric measures, despite the similar classifications.
Keywords:
asymmetric return distributions, money market funds, performance persistence
