Spanning tests for assets with option-like > payoffs: the case of hedge funds

P. Karehnke, Frans de Roon

Research output: Contribution to journalArticleScientificpeer-review

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 non-linearities in returns than option-based factor models. Applied to mutual funds and hedge funds, our tests usually suggest selecting different funds than standard tests, and find that a significant fraction, 11%, of hedge funds add 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.
Original languageEnglish
JournalManagement Science
Publication statusAccepted/In press - Jun 2019

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Assets
Hedge funds
Skewness
Investors
Mutual funds
Economic significance
Persistence
Performance evaluation
Mean-variance
Nonlinearity
Risk-averse

Keywords

  • hedge funds
  • mutual funds
  • writing options
  • performance evaluation
  • mean-variance-skewness spanning
  • prudence
  • portfolio choice

Cite this

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title = "Spanning tests for assets with option-like > payoffs: the case of hedge funds",
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 non-linearities in returns than option-based factor models. Applied to mutual funds and hedge funds, our tests usually suggest selecting different funds than standard tests, and find that a significant fraction, 11{\%}, of hedge funds add 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.",
keywords = "hedge funds, mutual funds, writing options, performance evaluation, mean-variance-skewness spanning, prudence, portfolio choice",
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year = "2019",
month = "6",
language = "English",
journal = "Management Science",
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publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",

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Spanning tests for assets with option-like > payoffs: the case of hedge funds. / Karehnke, P.; de Roon, Frans.

In: Management Science, 06.2019.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Spanning tests for assets with option-like > payoffs: the case of hedge funds

AU - Karehnke, P.

AU - de Roon, Frans

PY - 2019/6

Y1 - 2019/6

N2 - 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 non-linearities in returns than option-based factor models. Applied to mutual funds and hedge funds, our tests usually suggest selecting different funds than standard tests, and find that a significant fraction, 11%, of hedge funds add 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.

AB - 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 non-linearities in returns than option-based factor models. Applied to mutual funds and hedge funds, our tests usually suggest selecting different funds than standard tests, and find that a significant fraction, 11%, of hedge funds add 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.

KW - hedge funds

KW - mutual funds

KW - writing options

KW - performance evaluation

KW - mean-variance-skewness spanning

KW - prudence

KW - portfolio choice

M3 - Article

JO - Management Science

JF - Management Science

SN - 0025-1909

ER -