Performance Maximization of Actively Managed Funds

45 Pages Posted: 21 Jan 2010

See all articles by Paolo Guasoni

Paolo Guasoni

Dublin City University - School of Mathematical Sciences; Boston University - Department of Mathematics and Statistics

Gur Huberman

Columbia Business School - Finance and Economics

Zhenyu Wang

Indiana University, Kelley School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2010

Abstract

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

Guasoni, Paolo and Huberman, Gur and Wang, Zhenyu, Performance Maximization of Actively Managed Funds (January 1, 2010). FRB of New York Staff Report No. 427, Available at SSRN: https://ssrn.com/abstract=1539537 or http://dx.doi.org/10.2139/ssrn.1539537

Paolo Guasoni

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Gur Huberman

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Zhenyu Wang (Contact Author)

Indiana University, Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://www.kelley.iu.edu/Finance/Faculty/page12594.cfm?ID=37555

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