Trad. Perf. Eval. Mng Select Flashcards
Component of Performance Evaluation
- Performance Measurement
- Performance Attribution
- Performance Appraisal
Residual Term Generated from Holding-Based Attribution
Holdings-based attribution can generate a residual term between the portfolio performance and benchmark performance. The residual term cannot be explained by a fund manager’s actions. The residual can be the result of measuring a fund’s holdings less frequently than the frequency of fund transactions.
Manager Universe Benchmark
A manager universe—or manager peer group—is a broad group of managers with similar investment disciplines. Although not a benchmark, per se, a manager universe allows investors to make comparisons with the performance of other managers following similar investment disciplines.
Capture Ration
Upside/Downside ration = UC / DC
- Measures the asymmetry of return
- >1 = positive asymmetry (convex return profile)
- <1 = negative asymmetry (concave return profile)
Intraday Price Benchmark
Intraday Benchmarks - for funds that trade passively over the day, seek liquidity, or rebalancing. Do not expect the security to exhibit any short-term price momentum
- VWAP - volume-weighted average price of all trades execute the day or trading horizon
- Usually when PM wants to participate with volume patterns
- Works well when PM is executing buy and sell orders
- TWAP - time-weighted average price of trades executed over the trading day or trading horizon
- Used when outlier trades make VWAP unreliable (i.e. large buy orders at the day’s low or large sell orders at the day’s high)
Arrival Price Trading Strategy
Arrival price - price of the security at the time the order is entered into the market for execution
Typically used by short-term alpha traders, goal is to transact at or close to current market prices
Scheduled Algorithm
Scheduled (POV VWAP, TWAP) - scheduled algorithms send orders to the market following a schedule that is determined by historical volumes or specified time periods. It is appropriate for:
- PM has no expectations of momentum (adverse price moves)
- PM has greater risk tolerance for longer execution time periods
- Minimizing market impact
- Relatively small order size (5-10% of expected volume)
- Relatively liquid or balanced buy/well orders
Liquidity Seeking Algorithm
Liquidity-seeking algorithms are appropriate for large orders that the portfolio manager or trader would like to execute quickly without having a substantial impact on the security price.
Cash Drag
Cash drag is fund underperformance from holding uninvested cash in a rising market.
To minimize cash drag, one may use equitization strategy, which refers to temporarily investing cash using futures or ETFs to gain the desired equity exposure before investing in the underlying securities longer term. Equitization may be required if large inflows into a portfolio are hindered by lack of liquidity in the underlying securities.
Dark Pool
Dark pools provide anonymity because no pre-trade transparency exists. Exchanges are known as lit markets (as opposed to dark markets) because they provide pre-trade transparency—namely, limit orders that reflect trader intentions for trade side (buy or sell), price, and size. However, with a dark pool, there is less certainty of execution as compared to an exchange.
Regardless of the trading venue, transactions and quantities are always reported.
Carhart factor model
Model for evaluating fund portfolio performance:
- RMRF is the return on a value-weighted equity index in excess of the one-month T-bill rate
- RMRF = 1 –> broad-based market index
- SMB is the small minus big market capitalization factor
- SMB = -1 –> large-cap. Index
- HML is the high minus low factor
- HML = 0 –> No value/growth bias
- HML < 0 –> Growth tilt
- WML is the winners minus losers factor.
