The capture ratio is a widely used investment performance measure. We study the statistical problem of estimating the capture ratio based on a finite number of observations of a fund’s returns. We derive the asymptotic distribution of the estimator and use it for testing whether one fund has a capture ratio that is statistically significantly higher than another’s. We also perform hypothesis tests with real-world hedge fund data. Our analysis raises concerns regarding the models and sample sizes used for estimating capture ratios in practice.
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