A Performance Measure of Zero-Dollar Long/Short Equally Weighted Portfolios

Sharpe-like ratios have been traditionally used to measure the performances of portfolio managers. However, they suer two intricate drawbacks (1) they are relative to a peer's performance and (2) the best score is generally assumed to correspond to a "good" portfolio allocation, with no guarantee on the goodness of this allocation. In this paper, we propose a new measure to quantify the goodness of an allocation and we show how to estimate this measure in the case of the strategy used to track the momentum eect, namely the Zero-Dollar Long/Short Equally Weighted (LSEW) investment strategy. Finally, we show how to use this measure to timely close the positions of an invested portfolio.