Spanning Tests for Assets with Option-Like Payoffs: The Case of Hedge Funds

Paul Karehnke and Frans de Roon ()
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Frans de Roon: Department of Finance and CentER, Tilburg University, 5000 LE Tilburg, Netherlands

Management Science, 2020, vol. 66, issue 12, 5969-5989

Abstract: We draw on the skewness literature to propose regression-based performance evaluation tests designed for investments with option-like returns. These tests deliver conclusions valid for all risk-averse mean-variance-skewness investors and can better account for nonlinearities in returns than option-based factor models. Applied to mutual and hedge funds, our tests usually suggest selecting different funds than standard tests and find that a significant fraction (11%) of hedge funds adds value to investors, whereas this is an insignificant 4% for mutual funds. We also analyze the economic significance of these option-like returns and their out-of-sample persistence.

Date: 2020
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Citations: View citations in EconPapers (6)

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