Distribution of SkyRank Ratings

Some time after I began publishing SkyRank Ratings on a large number of funds, I found myself enjoying the process of examining the distribution of the Ratings on the funds. It provided a clean way to see if I missed anything when running the algorithm. Often times, I do, because the algorithm still sits in VBA inside excel, and the process of rating thousands of funds includes multiple excel templates, two of which include VBA code. It would be more fluid if the algorithm tied to the data directly with an API, but for now, it is what it is. In addition to helping to find any data cleaning mistakes, examining the distribution also allowed for me to identify if my preferences using SkyRank were lined up the way I wanted them to be. What I find most special about SkyRank is its flexibility in nature; it is a System that allows users to optimize their own preferences for hedge fund analysis, create their own algorithms, and the VBA code now simply reflects one user's preferences: mine. And my preferences, admittedly are pretty simple: AUM, Time, and a raw Sharpe Ratio (I would like to change the Sharpe to an adjusted Sharpe to account for auto-correlation of returns, which would go a long way to weed out blow-up risk). We do have plans to upgrade the software to allow all of our users to create their own algorithms, but we're not quite there yet.

Well, back to the distribution: for example, shortly after the credit crisis, about 50% of 8,000 hedge funds (now 11,000) received a 1-year SkyRank Rating of 'E', or a failing grade. This seemed about right to me given the 1-year returns got slaughtered the year following the crisis. The distribution of ratings is fairly normal during normal economic, financial market, and hedge fund times. When hedge funds outperform, the distribution tends toward the left side of the diagram reflecting more funds with a shorter-term higher quality rating. And during extremely bad times, as I mentioned, the skew to the diagram gets exaggerated to the lower quality side (right side). It kind of reminds me of a volatility skew which reflects normal, up-markets, showing low volatility, and sell-offs with much higher pumped volatility. At any rate, I thought it would be worthwhile to show this diagram that I often examine, typically around the middle of our data upload and ratings process.