I’m having a hard time understanding this. In the example they have Implicit Shortfall costs of 0.87%, the IS is adjusted then for the Expected Market Return of 1.00% and MAIS= 0.87%-1.00%= -0.13%… Why does IS become negative in such a situation?? I could see if the stock value went down or something but I’m totally lost on this situation.
I was confused by this too. I resigned to just accepting it and moving on. My best guess is that because you managed to lose only 87bps over the course of the trade, thats better than the 100bps that should have been lost based on how much the market moved over that time.
acc to IS, your costs thanks to delays and missed opportunities etc were 87bps
however, lucky for you, the market itself moved up pretty awesomely in the same period and gave you returns of 100bps
so even though you had costs of 87bps, these were entirely wiped out by the market gains, and then some…that leaves you with gains or 'negative costs…i.e. -13bps…
This is my understanding:
The implementation shortfall costs incorporates the effects of market evolution. So, if the calculated implementation shortfall is 0.87% while the market went up by 1%, you have to separate this from the manager performance, meaning that 0.87% cost is not 100% due to poor manager abilities - part of this cost is attributed to the fact that market prices went up and this is somehow independent of manager skills in minimizing the costs.
Removing the market evolution, the negative cost -0.13% shows that the manager actually performed quite well in minimizing the costs involved in trade execution.
(in the formula, you have to consider beta multiplied by market return)
after re reading the paragraph in the curriculum, i think my interpretion is wrong, and meshed seems to be right.
I got it now… Thanks Meshed!