The Sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund. Hedge fund returns differ significantly from a normal distribution. For this reason, other performance measures for hedge fund returns have been proposed in both the academic and practice-oriented literature. In conducting an empirical study based on return data of 2763 hedge funds, we compare the Sharpe ratio with 12 other performance measures. Despite significant deviations of hedge fund returns from a normal distribution, our comparison of the Sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds.

Investment managers specializing in insurance-linked securities (ILS) generate returns that behave unlike those of any other asset class. We introduce four ILS-specific factor models, which explain their time-series and cross-sectional variation. Despite a strong fit, we are left with positive-significant alphas for about one quarter of the funds in our sample, some of which can be attributed to industry loss warranty (ILW) exposures. In addition, they are related to fund size, age, and performance fees. Although we do not find evidence for market timing abilities, we can rule out luck as a cause of outperformance by controlling for false discoveries.