Choice of risk measure in evaluating UCITS funds of hedge funds

Undertakings for Collective Investment in Transferable Securities (UCITS) funds of hedge funds (FoHFs) are a fast-growing investment opportunity because of their distinctive characteristics with respect to other financial instruments. Constraints applied on UCITS FoHF investment selection can affect performance and risk and make these instruments different respect to other FoHFs. The hedge fund literature has thoroughly analyzed risk-adjusted performance (RAP) measures to determine the limits of the assumption of normality in evaluating such investment opportunities. While new RAP measures have been proposed to overcome these limits, no such empirical evidence exists for UCITS FoHFs. This paper evaluates the relevance of the choice of risk measure in selecting the best investment opportunities among a set of UCITS FoHFs for the period 2003–2011. The results demonstrate that, even if the rankings according to different RAP measures are correlated, RAP measures that remove the assumption of a normal return distribution may increase the persistence of the results and investments selection process based on such measures may lead to better performance, even during the global financial crisis.