Crossing a Rubicon into Active Money Management Realities: Performance Measurement When Funds Follow Opaque Strategies

Abstract

We develop a performance measure, termed MAP, which is based on the concept of ambiguity aversion, and is pertinent for actively managed funds that follow opaque investment strategies. When investors are ambiguity averse, our empirical evidence refutes the notion that many actively managed equity strategies outperform the (passive) market. We further contextualize the approach using strategies based on selling tail events in the equity, Treasury, volatility, and currency markets and find that these strategies underperform the market even when they have attractive Sharpe ratios. Our investigation addresses other questions including, the efficacy of hedge fund investments and carry trades.