A Fresh Look at Investment Performance Evaluation: Unifying Best Practices to Improve Timeliness and Reliability

Abstract

It's time for a fresh look, a new perspective, on investment performance evaluation, because performance evaluation is conducted much the same way today as it was 30 years ago. While peer groups and indexes have painted fuzzy evaluative pictures, a modern-day application of classical statistics unifies these two approaches to better differentiate success from failure. Portfolio simulations create a framework for comparing what actually happened to what could have happened, providing fair and accurate evaluations. The article provides answers to commonly asked questions and examples that demonstrate the evaluation of investment managers using portfolio simulations as the backdrop.

Keywords: Simulation, Performance Evaluation, Hedge Funds, Attribution, Monte Carlo,CFA Institute, Benchmarks, Returns-based Style Analysis, Style Analysis, Hypothesis Testing, Peer Groups, Indexes

JEL Classification: C12, C15, C44, C63, G11, G19, G20, M52, O31