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Performance Measurement and Attribution Analysis

Duration: 2 days
  • Performance Measurement and the Investment Process
  • Money-Weighted and Time-Weighted Return
  • Measuring Risk-Adjusted Performance
  • Measuring Relative Performance
  • Performance Appraisal
  • Macro and Micro Attribution Analysis
  • Global Investment Performance Standards (GIPS®)
  • Performance-related Fee System
The pobjective of this course is to give you a good understanding of tools and methods for measuring, evaluating and attributing investment performance.

We start with a discussion of the role of performance measurement in the investment process and of the importance of performance evaluation to fund sponsors and investment managers.

We then review various measures for computing rates of return, including money-weighted return, internal rate of return and time weighted return. We also discuss practical challenges such as obtaining and validating internal as well as external data.

Further, we present and explain various measures of risk-adjusted performance. These include traditional measures such as Treynor Index and the Sharpe Ratio, and newer and more sophisticated measures that take into account the increasingly asymmetric nature of return distributions. We also calculate and interpret the information ratio and other benchmark-relative measures.

Using attribution analysis, we then explain and illustrate how investment performance can be decomposed into “policy” and “active management” contributions. We also discuss the use of return-based style analysis in distinguishing between active managers and passive managers. Using multi-currency attribution analysis, we show how the currency contribution component can be calculated and interpreted.

Finally, we introduce and discuss the Global Investment Performance Standards (GIPS®). We identify and explain the requirements of each of the five main topics of the GIPS standards: input data, calculation methodology, composite construction, disclosures, and presentation and reporting. We also discuss the reporting requirements for sophisticated clients that have needs that go beyond GIPS.

Finally, we present various systems for calculating performance-related fees and we discuss the possible advantages and pitfalls in using such systems to align the interests of the manager with those of the investor.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Performance Measurement and the Investment Process

  • Investment Management as a Three-Step Process
  • The Importance of Performance Evaluation to Fund Sponsors and Investment manager

Measuring Return and One-Dimensional Performance

  • Measuring IRR and End-to-End Returns
  • Money-Weighted and Time-Weighted Return
  • Data Requirements – and the Problems in Collecting Data

Measuring Risk-adjusted Performance

  • The Importance of Risk Adjustment
  • Measures of Risk
    • Variance, standard deviation, covariance and correlation
    • Value-at-Risk and downside risk
  • Measures of Risk-Adjusted Performance
    • Jensen’ s Alpha and the Treynor Index
    • Sharpe Ratio
    • Sortino Ratio and ROMAD
  • Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Measuring Relative Performance

  • Peer-Groups (“Manager Universe”)
  • Types of Benchmarks
    • Equity and Fixed Income Benchmarks
    • Composite Benchmarks
    • Hedge Fund Benchmarks
  • Narrow-Based Benchmarks vs. Broad Market-Based Benchmarks
  • Some Problems in Using Benchmarks
    • Survivor Bias
    • Rebalancing and Liquidity
    • Sampling Bias
    • Style (Mis-) Classification
  • Measures of Relative Performance
    • Alpha, Tracking Error and Information Ratio
    • Risk Budget
  • Small Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Attribution Analysis and Style Analysis

  • Decomposing Portfolio Return
    • Index Effect, Allocation Effect and Selection Effect
  • Evaluating Global Portfolios
    • Market Allocation Effect
    • Currency Contribution
    • Selection Effect
  • Measuring Effectiveness of Diversification
  • Analysis of Extra-Market Risk (Barra)
  • Evaluation of Bond Portfolio Performance
    • Policy Effect
    • Rate Anticipation Effect
    • Analysis Effect
    • Trading Effect
  • Style Analysis
    • Using Return-Based Style Analysis in Judging Manager Style Consistency
    • Style Benchmarks
    • The Problem with “Measurement Error”
  • Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Global Performance Presentation Standards

  • Objectives and Key Characteristics of the GIPS® Standards
  • Requirements and Recommendations
    • Input Data
    • Portfolio Valuation
    • Accounting Methods
    • Return Calculations
    • Composites, Presentation and Reporting
  • Verification
  • Case Study: Performance Presentation that Complies with the GIPS® Standards

Performance-Related Fee Systems

  • Types of Fee Systems
    • Absolute/Relative, Symmetric/Asymmetric
    • Fee Systems with Threshold and “High Watermark” Clauses

Evaluation and Termination of the Seminar