We show that valuing performance is equivalent to valuing a particular contingent claim on an index portfolio. In general the form of the contingent claim is not known and must be estimated. We suggest approximating the contingent claim by a series of options. We illustrate the use of our method by evaluating the performance of 130 mutual funds during the period 1968–82. We find that the relative performance rank of a fund is rather insensitive to the choice of the index, even though the actual value of the services of the portfolio manager depends on the choice of the index.
Published in: _Journal of Empirical Finance_ (Vol. 1, Issue 2, January 1994, pp. 133-160) https://doi.org/10.1016/0927-5398(94)90001-9.