Portfolio Performance Manipulation and Manipulation-Proof Performance Measures

Posted: 26 Jun 2008

See all articles by Jonathan E. Ingersoll

Jonathan E. Ingersoll

Yale School of Management - International Center for Finance

Matthew I. Spiegel

Yale University - Yale School of Management, International Center for Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

Abstract

Numerous measures have been proposed to gauge the performance of active management. Unfortunately, these measures can be gamed. Our article shows that gaming can have a substantial impact on popular measures even in the presence of high transactions costs. Our article shows there are conditions under which a manipulation-proof measure exists and fully characterizes it. This measure looks like the average of a power utility function, calculated over the return history. The case for using our alternative ranking metric is particularly compelling for hedge funds whose use of derivatives is unconstrained and whose managers' compensation itself induces a nonlinear payoff.

Keywords: G11, G23, G24

Suggested Citation

Ingersoll, Jonathan E. and Spiegel, Matthew I. and Goetzmann, William N. and Welch, Ivo, Portfolio Performance Manipulation and Manipulation-Proof Performance Measures (2007). The Review of Financial Studies, Vol. 20, Issue 5, pp. 1503-1546, 2007, Available at SSRN: https://ssrn.com/abstract=1151564 or http://dx.doi.org/10.1093/rfs/hhm025

Jonathan E. Ingersoll (Contact Author)

Yale School of Management - International Center for Finance ( email )

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Matthew I. Spiegel

Yale University - Yale School of Management, International Center for Finance ( email )

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New Haven, CT 06520-8200
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HOME PAGE: http://som.yale.edu/~spiegel

William N. Goetzmann

Yale School of Management - International Center for Finance ( email )

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HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

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Ivo Welch

University of California, Los Angeles (UCLA) ( email )

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HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

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