Uses of Returns-Based and Holdings-Based Style Analysis
Selecting a manager involves assessing both returns and risk attribution. The objective is to choose the most suitable manager(s) based on portfolio requirements and limitations. It’s not always about picking the highest-returning manager. Often, the first step is analyzing a…
Type I and Type II Errors in Manager Selection Process
Candidates may remember their inferential statistics training from CFA Level I. This reading delves deeper into Type I and Type II errors within the context of hiring and firing investment managers. It's important to note that the null hypothesis presumes…
Components of a Manager Selection Process
Manager Universe Defining the Universe: What is the set of managers that best fits the portfolio's needs? Suitability: Which managers are suitable/permitted under the IPS? Style: Which style fits? Active vs passive Quantitative Analysis Investment Due diligence Attribution and appraisal:…
Evaluation of Investment Manager Skill
Sample Evaluation To evaluate manager performance, practitioners will use: Sample attribution analysis to tell us how the outperformance was achieved. Appraisal ratio analysis to compare Manager A's performance to other managers during the same period. Finally, a combination of the…
Risk Based Measures of Performance Appraisal
Finance academics and professionals have developed several returns-based measures to assess the value of active management. These concepts lend themselves well to testing and show up frequently on exams. Important measures which will be reviewed and/or introduced in this Los…
Risk Based Measures of Performance Appraisal
Finance academics and professionals have developed several returns-based measures to assess the value of active management. These concepts lend themselves well to testing and show up frequently on exams. Important measures which will be reviewed and/or introduced in this Los…
Benchmark Mis specification
Performance evaluation and attribution require selecting an appropriate benchmark. When benchmarks are mis specified (that is chosen incorrectly), performance measurement will be incorrect; both the attribution and the appraisal analyses will be useless. For example: A US equity manager is…
Benchmarking Alternative Investments
Alter alternative investments are notoriously difficult to benchmark. The selection of an appropriate benchmark is made difficult by: Lack of high-quality/investible market indexes. Frequent use of leverage. Limited liquidity. Lack of readily available market values. Use of IRR rather than…
Test of Benchmark Quality
SAMURAI The choice of benchmark often has a significant effect on the assessment of manager performance. Investment managers should be compared only with benchmarks that reflect the universe of securities available to them. A valid benchmark must satisfy certain criteria….
Asset-Based Benchmarks
The seven types of benchmarks introduced in this section are Absolute (including target) return benchmarks. Broad market indexes. Style indexes. Factor-model-based benchmarks. Returns-based (Sharpe style analysis) benchmarks. Manager universes (peer groups). Custom security-based (strategy) benchmarks. Absolute Return Benchmark An absolute…
