Portfolio Performance Manipulation and Manipulation-proof Performance Measures

Numerous measures have been proposed to gauge the performanceof active management. Unfortunately, these measures can be gamed.Our article shows that gaming can have a substantial impacton popular measures even in the presence of high transactionscosts. Our article shows there are conditions under which amanipulation-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 alternativeranking metric is particularly compelling for hedge funds whoseuse of derivatives is unconstrained and whose managers' compensationitself induces a nonlinear payoff.