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Portfolio Performance Manipulation and Manipulation-proof Performance Measures

Author

Listed:
  • Jonathan Ingersoll
  • Ivo Welch

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.

Suggested Citation

  • Jonathan Ingersoll & Ivo Welch, 2007. "Portfolio Performance Manipulation and Manipulation-proof Performance Measures," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1503-1546, 2007 17.
    • Handle: RePEc:oup:rfinst:v:20:y:2007:i:5:p:1503-1546
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    File URL: http://hdl.handle.net/10.1093/rfs/hhm025
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