Performance Maximization of Actively Managed Funds
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Date: 02-25-2008
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Gur Huberman, Columbia University - Graduate School of Business
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
If asset returns are unpredictable, only access to payoffs outside the benchmark space enables a fund manager to deliver superior returns relative to a set of benchmarks. Superior performance of a fund return is measured by its Sharpe ratio or by its appraisal ratio, which indicates the statistical significance of the fund’s alpha. Explicit formulas for the trading strategy that maximizes the performance ratios and for the consequent ratios themselves are derived. The performance-maximizing strategy is shown to be a variant of a buy-write strategy, which can be implemented by taking long positions in the benchmark assets and writing options on them. The manager’s ability to generate superior performance is discussed extensively under the assumption that he can trade the benchmark assets and derivatives on them as frequently as he wishes but has no superior ability to predict returns or access to additional assets.
BIO
Gur Huberman is the Robert G. Kirby Professor of Behavioral Finance
at the Graduate School of Business of Columbia University.
Previously, Mr. Huberman taught at Tel Aviv University and at the
University of Chicago. He holds a Ph.D. from Yale University.
Mr. Huberman has published over forty articles in professional journals, including the American Economic Review, the Journal of Political Economy, and the Journal of Finance.
His primary research interests include Behavioral Finance, Portfolio
Theory, Return-Risk tradeoffs, Money Management and Retirement Savings.