Measuring the Alpha of a Convexity-creating Fund: A Two-factor Approach

16 Pages Posted: 27 Oct 2020

See all articles by Mouhamadou Diouf

Mouhamadou Diouf

affiliation not provided to SSRN

Nicolas Gaussel

Metori Capital Management; Université Paris 1 Panthéon-Sorbonne

Pierre Jaffard

Massachusetts Institute of Technology (MIT)

Date Written: September 10, 2020

Abstract

We show that CAPM alphas of convexity-creating funds are consistently underestimated due to the average cost of their strategies, while the reverse is true for concavity-creating funds. Consequently, we develop an asset pricing model that disentangles convexity/concavity creation from the fund manager’s actual value-added. We illustrate the model using asset class by asset class returns data from a convexity-creating investment strategy, the Epsilon Global Trend Program (trend-following strategy on financial futures). The measurement differentials of value added between the CAPM and the model are found to be qualitatively and quantitatively significant.

Keywords: asset pricing, asset management, hedge fund, alpha, convexity

JEL Classification: G11, G12

Suggested Citation

Diouf, Mouhamadou and Gaussel, Nicolas and Jaffard, Pierre, Measuring the Alpha of a Convexity-creating Fund: A Two-factor Approach (September 10, 2020). Available at SSRN: https://ssrn.com/abstract=3690437 or http://dx.doi.org/10.2139/ssrn.3690437

Mouhamadou Diouf

affiliation not provided to SSRN

Nicolas Gaussel

Metori Capital Management ( email )

9 rue de la Paix
Paris, 75002
France

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

Université Paris 1 Panthéon-Sorbonne ( email )

ISJPS
5, Place du Panthéon
Paris, 75005
France

Pierre Jaffard (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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