Generalized Performance Measures: Optimal Overweighing of Fees Relative to Sample Returns

Posted: 5 Aug 2017

See all articles by Moshe Levy

Moshe Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Richard Roll

California Institute of Technology

Date Written: July 27, 2017

Abstract

Performance measures such as alpha and the Sharpe ratio are typically based on sample returns net of fees. This implies the same weighing to sample returns and to fees. However, sample return parameters are noisy estimates of true parameters, while fees are known with certainty. Thus, intuition suggests that fees should be given more weight than sample returns. We formalize this intuition, and derive the optimal overweighing of fees. We show that the resulting generalized performance measures are better predictors of future net performance than the standard performance measures, and they better explain future fund flows.

Keywords: Mutual Fund Performance, Alpha, Sharpe Ratio, Geometric Mean, Shrinkage, Fees

JEL Classification: G11

Suggested Citation

Levy, Moshe and Roll, Richard W., Generalized Performance Measures: Optimal Overweighing of Fees Relative to Sample Returns (July 27, 2017). Available at SSRN: https://ssrn.com/abstract=3013181 or http://dx.doi.org/10.2139/ssrn.3013181

Moshe Levy (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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