Normalized Risk-Adjusted Performance Measures Revisited: The Performance of FoHFs Before and After the Crisis

This paper revisits the performance of funds of hedge funds after the crisis using normalized risk-adjusted performance measures based on multi-factor models. First, we develop performance measures able to capture the variety of systematic risk sources. Second, we deal with the impact of smoothing on the risk return properties of FoHF using an adjustment technic for illiquidity. Third, we implement unbiased estimators to correct for the econometric bias induced by errors-in-variables (EIV) in asset pricing models. With these different adjustments, we analyze the persistence and stability of performance measures before and after the crisis for a data base of funds of hedge funds. Our results clearly show that the normalized risk-adjusted performance measures corrected for smoothing effect and EIV outperform the alternatives measures before and after the crisis.