Hi, I’m posting this to generate some AF opinions and ideas on whether it is possible to measure (on an ex post facto basis) whether an investment manager adds value in their tactical movements. For example, if investment manager A buys a stock at time T0 and then sells it at T1, I wanted to see if it’s possible to check whether investment manager A got out at the right time, or perhaps should have waited longer to time T2. That led me down the path of creating a shadow model portfolio based on the holdings and projecting the P&L past the sell date. That then ran into the issue of when exactly you would sell the stock in this model portfolio. So I decided to post here to see if anybody has come across something like this as a thought exercise or at work and what suggestions you might have. Thanks.
Level 3 performance attribution, but basically u r comparing the manager 2 the benchmark n performance is relative.
In a model portfolio you need to decide the rules beforehand for profit booking and stop loss
BiPolarBoyBoston is right. It is covered in CFA curriculum. Take the difference of portfolio performance with what the portfolio performance would’ve been if the weight to each stock was fixed and equal to the average weight across time. For example, if during period 1, stock A had weight on 2% and during period 2 weight of 0%, then the average is 1%. Does that help?
That’s a very interesting research topic. Are managers indeed creating value? I think, much of the debate is really in the definition of “value”. A portfolio manager, who is tracking an index, sells stock to ensure that the fund adheres to its policies and closely tracks the index. The PM still generates value even though the overall gain by the transaction may not be so high. The value - defined by the returns generated by a transaction, is incomplete and misleading. It should be looked at in tandem with the objective of the fund and the prior expectations from the transaction. The whole idea is to separate random gains from the methodic and consistent investment approach. Several fund managers got out of the market just before the fall of 2008. Did they really add value? Yes, if you consider that transaction. However, for researchers and investors, they want to know if this manager is superior to others. To answer this question, researchers take the long term approach. They argue that we can filter out the random gain by looking at long term track record. That’s where all the statistical measuers come into picture.