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Portfolio Performance Manipulation and Manipulation-proof Performance Measures

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Author Info
Jonathan Ingersoll
Ivo Welch

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Abstract

Numerous measures have been proposed to gauge the performance of active management. Unfortunately, these measures can be gamed. Our article shows that gaming can have a substantial impact on popular measures even in the presence of high transactions costs. Our article shows there are conditions under which a manipulation-proof measure exists and fully characterizes it. This measure looks like the average of a power utility function, calculated over the return history. The case for using our alternative ranking metric is particularly compelling for hedge funds whose use of derivatives is unconstrained and whose managers' compensation itself induces a nonlinear payoff. , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhm025
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 20 (2007)
Issue (Month): 5 (200717)
Pages: 1503-1546
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:20:y:2007:i:5:p:1503-1546

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  1. Loriana Pelizzon & Monica Billio & Mila Getmansky, 2008. "Crisis and Hedge Fund Risk," Working Papers 2008_10, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  2. Alexandros Kostakis, 2007. "Mind Coskewness: A Performance Measure for Prudent, Long-Term Investors," Discussion Papers 07/07, Department of Economics, University of York. [Downloadable!]
  3. Monica Billio & Mila Getmansky & Loriana Pelizzon, 2007. "Dynamic Risk Exposure in Hedge Funds," Working Papers 2007_17, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  4. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2009. "Risk Shifting and Mutual Fund Performance," NBER Working Papers 14903, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Daniel L. Thornton & Giorgio Valente, 2009. "Revisiting the predictability of bond risk premia," Working Papers 2009-009, Federal Reserve Bank of St. Louis. [Downloadable!]
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