Spanning Tests for Assets with Option-Like Payoffs: The Case of Hedge Funds

Management Science, Forthcoming

55 Pages Posted: 1 Oct 2015 Last revised: 7 Oct 2020

See all articles by Paul Karehnke

Paul Karehnke

ESCP Business School

Frans de Roon

Tilburg University - Department of Finance

Date Written: April 30, 2019

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

JEL Classification: G10; G11

Suggested Citation

Karehnke, Paul and de Roon, Frans A., Spanning Tests for Assets with Option-Like Payoffs: The Case of Hedge Funds (April 30, 2019). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2667473 or http://dx.doi.org/10.2139/ssrn.2667473

Paul Karehnke (Contact Author)

ESCP Business School ( email )

79 avenue de la République
75011
France

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

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