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Investment Performance Measurement: Evaluating and Presenting Results

ISBN: 978-0-470-47371-9
984 pages
May 2009
Investment Performance Measurement: Evaluating and Presenting Results (0470473711) cover image


Praise for Investment Performance Measurement

"This volume contains the insights of more than fifty prominent authorities on performance measurement. It is a must-have, must-read book for anyone involved in measuring, analyzing, or explaining investment results."
—John Schlifske, CFA,

President and Chief Executive Officer, Russell Investments

"Investment Performance Measurement: Evaluating and Presenting Results should be required reading for investors as well as investment performance professionals. This collection conveniently brings together some of the definitive texts on performance and risk analysis that are core to the investment profession."
—Frances Barney, CFA,

Managing Director, BNY Mellon Asset Servicing Performance & Risk Analytics

"It is vitally important that performance analysts remain well versed in the academic work that has been published in their field. This book is unique in that it assembles some of the most important papers in the field of performance measurement into one volume. This book should be read by all performance analysts who are serious about advancing in their field."
—Neil Riddles, CFA, CIPM,

Hansberger Global Investors, Inc.

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Table of Contents

Foreword xi

Robert R. Johnson, CFA

Introduction 1
Philip Lawton, CFA, CIPM, and Todd Jankowski, CFA


CHAPTER 1 Evaluating Portfolio Performance 11
Jeffery V. Bailey, CFA, Thomas M. Richards, CFA, and David E. Tierney


CHAPTER 2 Benchmarks and Investment Management 81
Laurence B. Siegel

CHAPTER 3 The Importance of Index Selection 189
Christopher G. Luck, CFA

CHAPTER 4 After-Tax Performance Evaluation 203
James M. Poterba

CHAPTER 5 Taxable Benchmarks: The Complexity Increases 217
Lee N. Price, CFA

CHAPTER 6 Overcoming Cap-Weighted Bond Benchmark Defi ciencies 233
William L. Nemerever, CFA

CHAPTER 7 Yield Bogeys 251
Brent Ambrose and Arthur Warga

CHAPTER 8 Jumping on the Benchmark Bandwagon: Benchmark Methodologies Are the Subject of Vigorous Debate 259
Crystal Detamore-Rodman


CHAPTER 9 Determinants of Portfolio Performance 267
Gary P. Brinson, L. Randolph Hood, CFA, and Gilbert L. Beebower

CHAPTER 10 Determinants of Portfolio Performance II: An Update 277
Gary P. Brinson, Brian D. Singer, CFA, and Gilbert L. Beebower

CHAPTER 11 Determinants of Portfolio Performance—20 Years Later 289
L. Randolph Hood, CFA

CHAPTER 12 Equity Portfolio Characteristics in Performance Analysis 293
Stephen C. Gaudette, CFA, and Philip Lawton, CFA, CIPM

CHAPTER 13 Mutual Fund Performance: Does Fund Size Matter? 307
Daniel C. Indro, Christine X. Jiang, Michael Y. Hu, and Wayne Y. Lee

CHAPTER 14 Multiperiod Arithmetic Attribution 327
José Menchero, CFA

CHAPTER 15 Optimized Geometric Attribution 351
José Menchero, CFA

CHAPTER 16 Custom Factor Attribution 367
José Menchero, CFA, and Vijay Poduri, CFA

CHAPTER 17 Return, Risk, and Performance Attribution 387
Kevin Terhaar, CFA

CHAPTER 18 Global Asset Management and Performance Attribution 397
Denis S. Karnosky and Brian D. Singer, CFA

CHAPTER 19 Currency Overlay in Performance Evaluation 457
Cornelia Paape


CHAPTER 20 On the Performance of Hedge Funds 481
Bing Liang

CHAPTER 21 Funds of Hedge Funds: Performance and Persistence 501
Stan Beckers

CHAPTER 22 Hedge Fund Due Diligence: Putting Together the Pieces of the Mosaic Helps Reveal Operational Risks 513
Cynthia Harrington, CFA

CHAPTER 23 Putting Risk Measurement in Context: Why One Size Does Not Fit All 517
Cynthia Harrington, CFA

CHAPTER 24 Conditional Performance Evaluation, Revisited 521
Wayne E. Ferson and Meijun Qian

CHAPTER 25 Distinguishing True Alpha from Beta 591
Laurence B. Siegel

CHAPTER 26 A Portfolio Performance Index 605
Michael Stutzer

CHAPTER 27 Approximating the Confi dence Intervals for Sharpe Style Weights 619
Angelo Lobosco and Dan DiBartolomeo

CHAPTER 28 The Statistics of Sharpe Ratios 629
Andrew W. Lo

CHAPTER 29 Risk-Adjusted Performance: The Correlation Correction 653
Arun S. Muralidhar

CHAPTER 30 Index Changes and Losses to Index Fund Investors 669
Honghui Chen, Gregory Noronha, CFA, and Vijay Singal, CFA

CHAPTER 31 Information Ratios and Batting Averages 693
Neil Constable and Jeremy Armitage, CFA

CHAPTER 32 The Information Ratio 705
Thomas H. Goodwin

CHAPTER 33 Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? 719
Roger G. Ibbotson and Paul D. Kaplan

CHAPTER 34 Fund Management Changes and Equity Style Shifts 731
John G. Gallo and Larry J. Lockwood

CHAPTER 35 Managing Performance: Monitoring and Transitioning Managers 745
Louisa Wright Sellers

CHAPTER 36 Does the Emperor Wear Clothes or Not? The Final Word (or Almost) on the Parable of Investment Management 757
Philip Halpern, Nancy Calkins, and Tom Ruggels

CHAPTER 37 Does Historical Performance Predict Future Performance? 767
Ronald N. Kahn and Andrew Rudd

CHAPTER 38 Evaluating Fund Performance in a Dynamic Market 785
Wayne E. Ferson and Vincent A. Warther

CHAPTER 39 Investment Performance Appraisal 799
John P. Meier, CFA

CHAPTER 40 Thinking Outside the Box: Risk Management Firms Put a Creative Spin on Coupling Theory with Practice 815
Susan Trammell, CFA


CHAPTER 41 Global Investment Performance Standards  825
Philip Lawton, CFA, CIPM, and W. Bruce Remington, CFA

APPENDIX A Global Investment Performance Standards (GIPS®) 899

APPENDIX B Corrections to GIPS Standards 2005: Last Updated October 31, 2006 951

About the Contributors 953

Index 956

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Author Information

Philip Lawton, PhD, CFA, CIPM, heads the Certificate in Investment Performance Measurement (CIPM) program at CFA Institute. His previous experience includes serving as vice president at State Street Analytics, where he supported the investment consulting firms that belong to the Independent Consultants Cooperative, and at Citibank, where he headed U.S. performance measurement in Worldwide Securities Services. Lawton is a frequent speaker on institutional investing and performance measurement at industry conferences.

Todd Jankowski, CFA, is Director of Curriculum Development for the Certificate in Investment Performance Measurement (CIPM) program at CFA Institute. Prior to joining CFA Institute, he was head of investment research in the Wealth Management division of Northwestern Mutual Life Insurance Company, where he had earlier held investment management positions in the Retail Advisory and Institutional Private Placement divisions.

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