Practical Portfolio Performance Measurement and Attribution by Carl R. Bacon

By Carl R. Bacon

This publication provide you with every little thing you must comprehend functionality analytics. it is good written and extremely entire. a few elements of this booklet may possibly bore you this dying, yet functionality analytics is uninteresting first of all (at least for me). there is rather a lot to profit and little to use specifically in case you use robust and dynamic investemnt instruments like bloomberg and factset which have already got the functions to do attribution, contribution, go back calculations, and hundreds different capabilities with none have to see the underlying calculation method. I supply this ebook four stars since it doesn't carry whatever new to the desk or any complex issues on fastened source of revenue and hedge money. although I hugely suggest it to anybody operating in a functionality analytics staff.

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Capped indexes Due to regulatory requirements or the specific requirements of the clients, customized indexes often include maximum limits for securities, countries, industrial sectors, etc. These limits should be reflected by fixed weights in the customized index, either at the maximum limit or to allow the portfolio manager an overweight allocation at a fixed level lower than the limit. Blended (or spliced) indexes It is possible to change the index associated with the measurement of a specific portfolio over time, a good example being after a change in investment strategy.

This is in effect what happened in the ‘‘late trading and market timing’’ scandal in US mutual funds revealed in 2003. Privileged investors were allowed to buy or sell units in international funds at slightly out-of-date prices with the knowledge that overseas markets had risen or fallen significantly already, resulting in small but persistent dilution of performance for existing unit holders. SELF-SELECTION With the choice of so many different, acceptable calculation methodologies, managers should establish an internal policy to avoid both intentional and unintentional abuse.

Hedged indexes Many index providers calculate index returns in a specific base currency, in local currency terms and hedged back to the base currency. Hedged calculation methods differ, one approach being to sell notional 1-month forward contracts at the start of the period of measurement and calculating a return based on the gain or loss on those contracts in conjunction with the gain or loss in the underlying assets. This method does not hedge dynamically. Currency positions caused by the market gains of the underlying assets during the month are therefore not hedged leading to a residual currency element in the hedged return.

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