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Omega ratio vs. Omega score

Jun 9, 2011 Marc Odo

It turns out a couple of academics have come out with a different metric known as the “omega-score” and it is in no way related to the Omega ratio Zephyr has in StyleADVISOR. Confusingly, the “omega score” is also tailored to look at hedge funds, but is an entirely different animal. The Omega ratio we have in the program is meant to describe the distribution of returns and was written by Keating & Shadwick in a 2002 paper.

In order to help you better understand the Omega ratio Zephyr Associates has also published our own research.  The first paper is bit more academic, the second piece is more practical.

The “omega-score”, unrelated to Zephyr’s Omega Ratio, is meant to quantify the operational risks a hedge fund might present. By operational risks, they mean things non-performance related that can still blow up the fund- things like: have the portfolio managers of the fund ever been convicted of fraud? How safe are their counterparties? Do they have odd valuation measures that hide the true value of the hedge fund’s investments? This way of looking at things is completely outside of our toolkit, and might be a source of confusion. This omega-score was on the cover of a recent CFA Institute magazine, so might be on a lot of people’s radar screen at the moment. It was drafted by Brown and Goetzmann in 2009. An abstract can be found here, but requires a fee.

We hope this helps you differentiate between the two Omegas. If you have any questions, drop us a line.


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