• Fund managers may be tempted to selectively report performance metrics that reflect favorably on their performance.
• The correlations between major performance metrics, such as Sharpe, Treynor, information, and Sortino ratios, have remained consistent over time.
• If a fund manager only highlights certain performance metrics and excludes others, it could suggest strategic reporting.
• Managers could strategically report Sortino or information ratios while remaining silent on Sharpe and Treynor ratios.
• Investors should conduct further investigation if a fund manager selectively reports performance metrics.

Do Fund Managers Cherry-Pick Performance Metrics to Correlate?

Portfolio managers often use various performance metrics, such as Sharpe, Treynor, information, and Sortino ratios, to showcase their risk-adjusted performance. However, there is a concern that fund managers may selectively report metrics that paint a more favorable picture of their performance. This issue becomes more critical if the performance metrics have weak or negative correlations.

A study analyzed the correlations between performance metrics over time to determine if fund managers engage in strategic reporting. The study used returns from large-cap equity funds dating back to the 1950s and calculated the Sharpe, Treynor, Sortino, and information ratios on a one-year rolling basis. The analysis aimed to uncover any changes in the correlations between these metrics and whether managers strategically report certain metrics.

The study found that the Sharpe and Treynor ratios have high positive correlations, as do the information and Sortino ratios, over the entire time period. However, the Sharpe and Treynor ratios exhibit weak correlations with the information and Sortino ratios. This suggests that if a fund manager highlights their Sortino ratio but ignores their Sharpe or Treynor ratio, it may signal strategic reporting.

The analysis also looked at the correlations between performance metrics during different decades and recessions. The correlations remained similar during both non-recession and recession periods, indicating that the correlations are stable even during critical market conditions.

Overall, the results suggest that the correlations between major performance metrics have remained consistent over time. While the correlations between Sharpe and Treynor ratios, as well as information and Sortino ratios, are strong, the correlations between these pairs of metrics are weak. This provides an opportunity for fund managers to strategically report certain metrics while excluding others. Investors should be aware of this possibility and conduct further investigation if a fund manager selectively reports performance metrics.

Disclaimer: The opinions expressed in this article are solely those of the author and do not reflect the views of pankajsihag.com or the author’s employer.