Performance Attribution: Measuring Dynamic Allocation Skill
21 Pages Posted: 27 Mar 2010 Last revised: 11 Aug 2013
Date Written: March 26, 2010
Classical performance attribution methods decompose manager alpha into factor allocation and stock selection components. A manager can produce alpha through factor tilts relative to a benchmark and by stock selection within each factor. However, traditional attribution methods do not explicitly assess a manager’s dynamic allocation skill in the factor domain. We propose a generalized framework for performance attribution that decomposes the allocation effect into value-added from both static and dynamic factor exposures and thus yields additional insight into sources of manager alpha. Such a decomposition can assist investors in identifying and quantifying manager skill, provide insight into a managers investment approach, style, and biases, as well as aid in benchmark selection and creation.
Keywords: Performance Attribution, Mutual Funds, Brinson Attribution
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