Abstract
Market liquidity is complex to measure empirically. This explains why there is no consensus about performance ratios adjusted to its risk. We summarize market liquidity by two major characteristics: a costly one because of the loss of illiquidity premium; and a profitable one when investors can withdraw when they want.Then, in this paper, three new performance indicators are proposed to integrate, to a certain extent, market liquidity risk, especially for hedge funds investment: Liquidity-loss ratio will capture the cost characteristic whereas Liquidity-Sharpe ratio and Liquidity-profit ratio the profitable one. These new ratios try to be simple enough and also precise to help investors to choose between hedge funds strategies according to their liquidity profile: do they want to capture illiquidity risk premium? Do they want to be free to withdraw?
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