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Portfolio Performance Manipulation and Manipulation-Proof Performance MeasuresJonathan E. Ingersoll Jr.Yale School of Management - International Center for Finance Matthew I. SpiegelYale University - Yale School of Management, International Center for Finance William N. GoetzmannYale School of Management - International Center for Finance; National Bureau of Economic Research (NBER) Ivo WelchUniversity of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER) 2007 The Review of Financial Studies, Vol. 20, Issue 5, pp. 1503-1546, 2007 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.
Keywords: G11, G23, G24 Accepted Paper SeriesDate posted: June 26, 2008Suggested CitationContact Information
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