Keeping in mind the asymmetry of returns in hedge funds, in the next part of this section, the Sharpe ratio, Upside Potential ratio and the Sortino ratio were compared for all strategies, for the whole period; the crisis period and the after-crisis period, ranked in each period and compared with the overall strategy performance in that period, as a test of reliability of these ratios.

Over the whole period, the Global Macro had the highest Sharpe ratio with Multi Strategy being ranked the next highest. The Sortino ratio ranking was similar and different from the Upside Potential ratio. The rank correlation coefficient showed a significant relationship at the 1% level, with both the Sharpe ratio rankings and the Sortino ratio rankings (Table 12).

Table 12. Overall performance rankings compared to reward risk ratio rankings in whole period.

Strategy/Rank+ Performance Sharpe Upside Potential Sortino
Convertible Arbitrage 5 7 3 7
Short Bias 1 1 4 1
Emerging Markets 9 5 5 6
Equity Market Neutral 2 2 1 2
Event Driven 6 9 9 9
Fixed Income Arbitrage 4 6 2 5
Global Macro 11 11 11 11
Long/Short Equity 8 8 8 8
Managed Futures 3 3 10 3
Multi-Strategy 10 10 7 10
SPX 7 4 6 4
Rank correlation coefficient   0.8091 ** 0.5364 0.8545 **

During the crisis period, Short Bias and Managed Futures had, the highest Sharpe and Sortino ratios and, overall, there was a high degree of correlation for all three measures, with the Sortino ratio having the most significant relationship with the overall strategy performances (Table 13).

Table 13. Overall performance rankings compared to reward risk ratio rankings during crisis.

Strategy/Rank+ Performance Sharpe Upside Potential Sortino
Convertible Arbitrage 4 5 3 5
Short Bias 9 11 8 10
Emerging Markets 6 7 7 8
Equity Market Neutral 2 8 10 6
Event Driven 8 2 5 3
Fixed Income Arbitrage 3 4 1 2
Global Macro 10 9 9 9
Long/Short Equity 7 6 6 7
Managed Futures 11 10 11 11
Multi-Strategy 5 3 4 4
SPX 1 1 2 1
Rank correlation coefficient   0.6091 0.6182 * 0.7727 **

In the after-crisis period, Fixed Income Arbitrage had the highest Sharpe ratio, while Convertible Arbitrage had the highest Upside Potential and Sortino ratios. Only the Sharpe and Sortino ratios had a significant correlation with the overall strategy performance, for all periods (Table 14).

Table 14. Overall performance rankings compared to reward risk ratio rankings in after crisis period.

Strategy/Rank+ Performance Sharpe Upside Potential Sortino
Convertible Arbitrage 9 9 11 11
Short Bias 1 1 1 1
Emerging Markets 7 6 5 6
Equity Market Neutral 3 3 2 2
Event Driven 5 5 6 4
Fixed Income Arbitrage 8 11 7 7
Global Macro 4 8 9 9
Long/Short Equity 6 4 8 8
Managed Futures 2 2 4 3
Multi-Strategy 10 10 10 10
SPX 11 7 3 5
Rank correlation coefficient   0.7909 ** 0.5091 0.6636 *

In summary, in all periods, only the Sortino ratio ranking had a significant relationship with the ranking in performances, making it the most reliable ratio. Such results were also confirmed by other researchers. This emphasised the superiority of the downside risk framework in analysing hedge fund returns.