By Christopher G. Luck, Thomas M. Richards, Kevin Terhaar, Jeffrey V. Bailey, Wayne A. Kozun, Lee N. Price
Funding functionality, even if of portfolios or person managers, can't be evaluated with no functionality yardstick (i.e., a benchmark); despite the fact that, settling on the incorrect benchmark will be as harmful as terrible portfolio administration. The authors during this lawsuits speak about what constitutes a suitable benchmark, find out how to pick out acceptable benchmarks, and the way to behavior attribution research, either probability and go back.
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Extra info for Benchmarks and Attribution Analysis
And for an investment in a limited partnership, the sponsor often cannot get a reasonable valuation on the investment for years. Macro-attribution also requires having appropriate benchmarks and a longterm perspective. Doing this analysis without good benchmarks makes no sense because the attribution merely explains noise, which is a waste of time. Therefore, a concentrated effort must be made to find appropriate benchmarks. A consistent, long-term perspective evaluated in appropriate intervals is also needed for macro-attribution to be effective in guiding investment decision making.
Considering that the total fund’s cumulative return exceeded the upper 10 percent confidence level, the fund appears to have benefited from skill, not luck. Panel B of Figure 1 shows the added value of the sponsor’s investment program for rolling 18-month periods. In this panel, the volatility measurement used to test the null hypothesis of “no skill added” changes over time as the rolling window moves along. Panel B has a jagged confidence interval as opposed to the smooth confidence band in Panel A because Panel A used only one volatility number for that entire period of time.
From a macro-attribution perspective, distinguishing between these two sources of return and risk is important. The sponsor has control over investment style decisions through its manager selection choices; however, the sponsor has no direct control over the active-management value provided by its managers. Just as I calculated the investment policy level contributions by using the benchmarks for each asset category in Table 2, I can calculate the contributions of each manager’s investment style.