“The misfit active return is misfit in the sense that it measures that part of the manager’s return from using a benchmark that is not suited to the manager’s style.” i have no idea what this means. can someone explain it. i understand the math, but the relevance of this eludes me.
The manager might be a little bit smarter than everyone else, he exploits this and earns above the benchmark… He is a misfit!!!
manager manages portfolio to a benchmark. There is a benchmark that is assigned to him, and there is a normal benchmark that he follows (A universe of securities he makes selection from) misfit return is between normal benchmark and the benchmark that is assigned to him
its the return difference between the benchmark returns. manager has nothing to do with it except for choosing the benchmark, which is not same as investors benchmark. so if managers made tons of money or lost, misfit would be the same. but his true active would be affected.
turkish_dude Wrote: ------------------------------------------------------- > its the return difference between the benchmark > returns. manager has nothing to do with it except > for choosing the benchmark, which is not same as > investors benchmark. so if managers made tons of > money or lost, misfit would be the same. but his > true active would be affected. it might be that this misfit contributes to his active return (active in a sense of investors benchmark)
ok that would be “total active return” “true active return” would not be affected
meh, sounds like more fluff to me.
thanks for the replies though.
Misfit return is definitely about a mismatch between benchmarks, but I thought that it was the part of the return that comes from the plan sponsor giving or allowing the manager to use a benchmark that isn’t quite the same as the plan sponsor’s strategic allocation. For example, suppose that pension plan X says its equity allocation is benchmarked to the S&P500. The plan then hands some money to a manager A that manages to the Russel 2000 small cap index, where there is alpha. When you evaluate the manager’s performance, it’s important to evaluate his/her performance relative to the benchmark he/she was given, which is the smallcap benchmark. That manager is responsible for only the difference between fund A and the smallcap index. Meanwhile, back at fund X, people are looking at fund A’s performance relative to the S&P, which is fund X’s benchmark. If smallcaps did poorly compared to S&P, it could be that fund manager A did fine relative to smallcaps but didn’t do well compared to S&P because smallcaps as a class did poorly. So… misfit return is the portion of Fund A’s return viewed from Pension Plan X’s perspective that comes from the mismatch of benchmarks. The difference between the S&P and the smallcap index isn’t the fault of Fund A’s manager, it’s the fault of the guy at Plan X, who decided that it was ok to use a smallcap index.
sounds about right. so return between the bechmarks is mistif, return between smallcap-fund is true active… and return between s&p- fund is total active. only i dont disagree with your alpha. return obtained bcoz of choosing russell over s&p is not alpha.
Just memorize the formula and move on. Understanding this is a June 8 matter…
bchadwick great in depth explanation IMO. Gooman, I think you are almost right, Understanding this is a June 8 matter…unless they ask an essay question on it, then you need to have enough understanding to answer it. I think comp_sci_kid’s answer above should suffice for an essay question on the test IMO if is asked. Do people agree or does more need to be added?