This post was originally published on August 22, 2007. It has been republished from a previous version of the site.
The Omega Measure is a popular fund evaluation tool, allowing traditional economic decision theory to guide asset allocators. Assets can be compared either at specific return thresholds or across a whole range of desired of returns. Though typically used to evaluate fund-of-fund managers’ performance, I have here applied the Omega ratio to the ETF and CEF market at various specific thresholds.
As the Omega measure at a given return threshold is calculated on the Omega function, defined to be homeomorphic to cumulative return density functions, I have used the intuitive upper / lower partial moment method of calculation. The thresholds used are no return (0), the average SPY return, the average IWM return, and twice the average IWM return. I have weighted each return threshold thusly: 10% for 0 return, 50% for SPY return, 30% for IWM return, 10% for double IWM return. To be fair, I have used only ETFs and CEFs that have traded at least 250 periods, and thus only 250 periods for each.