Performance Maximization of Actively Managed Funds
45 Pages Posted: 21 Jan 2010
Date Written: January 1, 2010
Ratios that indicate the statistical significance of a fund’s alpha typically appraise its performance. A growing literature suggests that even in the absence of any ability to predict returns, holding options positions on the benchmark assets or trading frequently can significantly enhance performance ratios. This paper derives the performance-maximizing strategy - a variant of buy-write - and the least upper bound on such performance enhancement, thereby showing that if common equity indexes are used as benchmarks, the potential performance enhancement from trading frequently is usually negligible. The enhancement from holding options can be substantial if the implied volatilities of the options are higher than the volatilities of the benchmark returns.
Keywords: alpha, hedge funds, mutual funds, portfolio management, options
JEL Classification: G11, G12, G13, G14
Suggested Citation: Suggested Citation