Do investors gain by selling the tails of return distributions?

Abstract This paper examines whether investors gain by selling the tails of return distributions. To address this, we develop a way of ranking and scoring actively managed funds and investment strategies, which accounts for ambiguity aversion and risk aversion in decision‐making. Using data relating to options on the S&P 500 equity index and Treasury bond futures and to hedge funds, we provide evidence that suggests a negative answer to this question. We reinforce this evidence with data from options on the STOXX 50, FTSE, and Nikkei equity indices.