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Spanning Tests for Assets with Option-Like Payoffs: The Case of Hedge Funds

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  • Paul Karehnke

    (Department of Finance, ESCP Business School, 75011 Paris, France)

  • Frans de Roon

    (Department of Finance and CentER, Tilburg University, 5000 LE Tilburg, Netherlands)

Abstract

We draw on the skewness literature to propose regression-based performance evaluation tests designed for investments with option-like returns. These tests deliver conclusions valid for all risk-averse mean-variance-skewness investors and can better account for nonlinearities in returns than option-based factor models. Applied to mutual and hedge funds, our tests usually suggest selecting different funds than standard tests and find that a significant fraction (11%) of hedge funds adds value to investors, whereas this is an insignificant 4% for mutual funds. We also analyze the economic significance of these option-like returns and their out-of-sample persistence.

Suggested Citation

  • Paul Karehnke & Frans de Roon, 2020. "Spanning Tests for Assets with Option-Like Payoffs: The Case of Hedge Funds," Management Science, INFORMS, vol. 66(12), pages 5969-5989, December.
    • Handle: RePEc:inm:ormnsc:v:66:y:12:i:2020:p:5969-5989
    DOI: 10.1287/mnsc.2019.3429
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