Performance of the Infiniti Capital

Single Fund Analysis Score (SFA)

as a Risk Adjusted Performance
Measure ( RAPM)
By Peter Urbani, CIO, Infiniti Capital

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The Infiniti SFA Total Score as a RAPM
This presentation shows the realised performance of 4 portfolios built from a common
data set each using a different Risk Adjusted Performance Measure (RAPM) as the
objective function to be maximised.

Performance is shown on an out-of-sample (ex post) basis and the data set used was a
common sample universe of 36 anonymised hedge funds and the portfolios were
rebalanced on a quarterly basis.

The RAPM’s used were the Sharpe, Sortino & Omega ratios and the Infiniti SFA Total
Score.
The SFA Total score produces superior risk adjusted returns (CAGR/ABS(Drawdown)) for
the following reasons:

It imposes a positively skewed distribution on the data during the in-sample optimisation and this shape is stable
enough to persist out-of sample (predictive)

The Sharpe ratio does not differentiate between upside and downside risk

The Sortino ratio can too easily generate zero downside portfolios in the in-sample period but these do not persist as
well out of sample (over-fitting)

The Omega ratio has the advantage of being distribution independent but still has the downside area of the distribution
as its denominator, therefore it does not explicitly try to truncate the left tail as the SFA Score does.

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 Out-of-Sample Returns
180

SFATotal CAGR: 15.1%

170
OmegaCAGR: 12.9%

160 SharpeCAGR: 11.4%

SortinoCAGR: 10.1%
150 EquallyWeightedFundCAGR: 10.4%

140

130

120

110

100

90

80

Note: All returns shown are Gross of any fees

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 Table of Statistics

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 Out-of-Sample Returns 2008
4.00%
SFATotal
2.00%

0.00% +4.98%
-2.00%

-4.00%

4.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Omega
2.00%

0.00% +2.58%
-2.00%

-4.00%
4.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Sharpe
2.00%

0.00% +4.40%
-2.00%

-4.00%

6.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

4.00% Sortino

2.00%
0.00% -0.86%
-2.00%
-4.00%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

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 Weights through time (Quarterly)
SFA Total Omega
100% 100%
The Charts to the Left
90% 90% Fund 50
Example Example Fund 50
80% 80% Fund 17
Example
show the weights
Example Fund 17
70% 70%
Example Fund 7
through time of each of
Example Fund 7
60% 60%
Example portfolios
Fund 30 (SFA Total,
50% 50% Fund 30 Example
40% Example
40% Fund 10 Omega,
Example Fund 10Sharpe,
30% 30% Fund 9
Example Sortino
Example Fund 9) with quarterly
20% 20%
10%
Example Fund 5
10%
rebalancing
Example Fund 5 of the
0%
Example Fund 19
0% common
Example Fund 19 universe of 36
Example Fund 49 Example Fund 49
funds
r -0 6

r -0 7

r -0 8

r -0 9

r -0 6

r -0 7

r -0 8

r -0 9
l -0
6

l -0
7

l -0
8

l -0
6

l -0
7

l -0
8
t -0 6

t -0 7

t -0 8

t -0 6

t -0 7

t -0 8
n -06

n -07

n -08

n -09

n -06

n -07

n -08

n -09
Example Fund 39 Example Fund 39
1-Ju

1-Ju

1-Ju

1-Ju

1-Ju

1-Ju
1-O

1-O

1-O

1-O

1-O

1-O
1-Ja

1-Ja

1-Ja

1-Ja

1-Ja

1-Ja

1-Ja

1-Ja
1-A

1-A

1-A

1-A

1-A

1-A

1-A

1-A
p

p
c

c
Sharpe Sortino
100% 100%
90% 90% Fund 50
Example Example Fund 50
80% 80% Fund 17
Example Example Fund 17
70% 70%
Example Fund 7 Example Fund 7
60% 60%
50% Example
50% Fund 30 Example Fund 30
40% Example
40% Fund 10 Example Fund 10
30% 30% Fund 9
Example Example Fund 9
20% 20%
Example Fund 5 Example Fund 5
10% 10%
Example Fund 19 Example Fund 19
0% 0%
Example Fund 49 Example Fund 49
r -0 6

r -0 7

r -0 8

r -0 9

r -0 6

r -0 7

r -0 8

r -0 9
l -0
6

l -0
7

l -0
8

l -0
6

l -0
7

l -0
8
t -0 6

t -0 7

t -0 8

t -0 6

t -0 7

t -0 8
n -06

n -07

n -08

n -09

n -06

n -07

n -08

n -09
Example Fund 39 Example Fund 39
1-Ju

1-Ju

1-Ju

1-Ju

1-Ju

1-Ju
1-O

1-O

1-O

1-O

1-O

1-O
1-Ja

1-Ja

1-Ja

1-Ja

1-Ja

1-Ja

1-Ja

1-Ja
1-A

1-A

1-A

1-A

1-A

1-A

1-A

1-A
p

p
c

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 Realised Best-Fit Value at Risk 95%
1.00%

0.00%

-1.00%

-2.00%

SFATotal ( Avg -1.2%)

-3.00% Omega ( Avg -0.8%)

Sharpe (Avg -0.7%)

Sortino ( Avg -1.5%)

-4.00%
EquallyWeightedFund ( Avg -1.7%)

-5.00%
r -0
7

r -0
8
b -0
7

p -0
7

b -0
8

p -0
8
c -0
6

r -0
7

n -0
7
l -0
7

c -0
7

r -0
8

n -0
8
l -0
8

c -0
8
g -0
7

t -0
7

g -0
8

t -0
8
n -0
7

y -0
7

v -0
7

n -0
8

y -0
8

v -0
8

n -0
9
Ju

Ju
O

O
M

M
Ju

Ju
Ja

Ja

Ja
D

D
A

A
M

M
N

N
p

p
S

S
e

e
A

A
F

F
c

c
u

u
e

e
o

o
a

a
a

a
12 Month rolling Best-Fit Infiniti VaR
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 Portfolio Best-Fit Distributions
0.04

SFATotal (Gumbel (Max) )

0.04

Omega(Johnson(Lognormal) )
0.03
Sharpe(Mixtureof Normals )

0.03 Sortino(ModifiedNormal )

0.02

0.02

0.01

0.01

0.00
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

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 Best-Fit Distributions
0.04 0.04 The Charts to the Left
0.04 0.04Fit
Portfolio Best Portfolioshow
Best Fit the best-fitting
Distribution ( Omega )
0.03
Distribution ( SFA Total )
0.03
distribution for each of
BenchmarktheBest Fit
portfolios built
Benchmark Best Fit
0.03 Distribution
Distribution0.03 using the SFA Total
0.02 0.02 Score, Sharpe, Sortino
0.02 0.02 or Omega ratio’s. Also
0.01 0.01
shown in grey is the
best fitting distribution
0.01 0.01
of the Equally
0.00 0.00 Weighted (Benchmark)
-0.15 -0.1 -0.05 0 0.05 0.1 0.15-0.2 0.2 -0.1 0 0.1 portfolio. 0.2

0.04 0.04

Portfolio Best Fit

As you can see the
0.04 0.04 Portfolio Best Fit
Distribution ( Sharpe ) SFA
Distribution portfolio
( Sortino ) had the
0.03 0.03 most
Benchmark Best Fit Benchmark Best positive
Fit
0.03 Distribution
0.03 skewness and good tail
Distribution

0.02 0.02 protection.

0.02 0.02

0.01 0.01

0.01 0.01

0.00 0.00
-0.2 -0.1 0 0.1 -0.2 0.2 9-0.1 0 0.1 0.2
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 Piecewise Non-Linear Regression
0.06 0.06 The Charts to the Left
SFA Total versus Equally Weighted Fund Omega versus Equally Weighted Fund show the piecewise
0.04 0.04 regressions of each of
the out-of-sample
0.02 0.02 portfolios constructed
using either the SFA
0.00 0.00 Total Score, Sharpe,
Sortino or Omega
-0.02 -0.02
ratio’s against an
Equally Weighted
-0.04 -0.04
(Benchmark) portfolio.
-0.05 -0.04 -0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 -0.05
0.04 -0.04
0.05 -0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 0.04 0.05

0.06 0.06
As you can see the
Sharpe versus Equally Weighted Fund Sortino versus Equally Weighted Fund SFA portfolio had the
0.04 0.04
best upside capture to
downside capture.
0.02 0.02

0.00 0.00

-0.02 -0.02

-0.04 -0.04
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-0.05 -0.04 -0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 -0.05
0.04 -0.04
0.05 -0.03 -0.02 -0.01 0.00 0.01 0.02 0.03 Powered
0.04 0.05
 Bi-Variate Best Fit Copula
0.08 0.08

SFA Total Omega The Charts to the Left

0.06 0.06 depict the best-fit bi-
variate Copula of each
Zone 2
0.04 0.04
of the out-of-sample
portfolios constructed
0.02 0.02
using either the SFA
Total Score, Sharpe,
0 0
Sortino or Omega
-0.05 -0.04 -0.03 -0.02 -0.01 0 0.01 0.02 -0.05
0.03 -0.04
0.04 -0.03
0.05 -0.02 -0.01 0 0.01 0.02
ratio’s as the objective
0.03 0.04 0.05

Zone 4 -0.02 -0.02

function or risk
adjusted performance
-0.04 -0.04
measure (RAPM) to
0.08 0.08
maximize. Shown here
Sharpe Sortino against the common
0.06 0.06
benchmark.

0.04 0.04
As you can see the
SFA portfolio had the
0.02 0.02 best zone 2 (upside) to
zone 4 ( downside )
0 0 dependence.
-0.05 -0.04 -0.03 -0.02 -0.01 0 0.01 0.02 -0.05
0.03 -0.04
0.04 -0.03
0.05 -0.02 -0.01 0 0.01 0.02 0.03 0.04 0.05

-0.02 -0.02

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 Conclusions
The SFA Total score produces superior risk adjusted returns (CAGR/ABS(Drawdown)) for
the following reasons:

It imposes a positively skewed distribution on the data during the in-sample optimisation and this shape is stable
enough to persist out-of sample (predictive)

The Sharpe ratio does not differentiate between upside and downside risk

The Sortino ratio can too easily generate zero downside portfolios in the in-sample period but these do not persist as
well out of sample (over-fitting)

The Omega ratio has the advantage of being distribution independent but still has the downside area of the distribution
as its denominator, therefore does not explicitly try to truncate the left tail as the SFA Score does.

For further information or to download a free trial of the Infiniti Analytics Suite
which was used to generate these results please go to:

www.infiniti-analytics.com

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 Disclaimer
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