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Title:Performance maximization of actively managed funds PDF Logo
Authors:Guasoni, Paolo
Huberman, Gur
Wang, Zhenyu
Issue Date:2010
Series/Report no.:Staff Report, Federal Reserve Bank of New York 427
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.
Subjects:Alpha
hedge funds
mutual funds
portfolio management
options
JEL:G11
G12
G13
G14
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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