I often see it quoted that the M2 measure offers an advantage over the sharpe, as sharpe is 'difficult to interpret' for negative returns. eg: https://en.wikipedia.org/wiki/Modigliani_risk-adjusted_performance#:~:text=The%20M2%20measure%20is,to%20the%20risk%2Dfree%20rate.
However, consider the following returns:
This has the following sharpe and M2 ratios:
Now Fund A has been more been more volatile and has eeked out a 1% return. Fund B has been less volatile and made a small loss. Both have beaten the benchmark.
Look at the M2 ratios. Fund A sees its M2 return reduced as it has been more volatile than the benchmark. Fund B's M2 shows a worse return, ie greater loss, despite having lower volatility than the benchmark.
Seems to me that Fund B should be showing a smaller loss if the M2 measure is meant to fix working with fund losses? Am I misunderstanding how M2 is meant to be applied?