Mutual fund evaluation: a portfolio insurance approach: A heuristic application in Spain

Usual techniques for evaluating mutual funds are based on asset pricing models (CAPM and APT) that are related to the mean–variance analysis, where risk aversion is assumed. Nonetheless we think that, at least in Spain and perhaps in continental Europe, a significant group of investors can be further portrayed by skewness preference. With this kind of investors in mind, we adopt a different approach based on option pricing theory. In particular, we show how to apply the portfolio insurance dynamics to the evaluation of mutual funds. We estimate insurance premia for 35 Spanish funds of diverse composition, and we also compute their net-of-downside-risk returns. We then rank funds according to both criteria. We also analyze the effect of transactions costs on these variables.