We propose a new performance evaluation method which allows for investors with skewness preference and is designed for assets with option-like returns. Our method delivers conclusions, which are neither parameter nor investor dependent, and we show that it is better able to account for non-linearities in returns than previously proposed option-based factor models. Applied to hedge funds, our method yields different conclusions compared to standard tests, especially in the recent sub-sample, for younger funds, and compared to mutual funds. While our main conclusions are based on statistical tests, we also verify that our framework leads to economically significant performance adjustments.
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