CARL R. BACON, CIPM, is Chief Advisor to Confluence. He is a member of the Advisory Board of the Journal of Performance Measurement and Founder of The Freedom Index Company. He is the former Chairman of StatPro plc, Director of Risk Control and Performance at Foreign & Colonial Management Ltd and Vice President Head of Performance (Europe) for JP Morgan Investment Management Inc.

Contents

Acknowledgements

Contents

Chapter 1 Introduction

The Performance Measurement Process

Role of performance analysts

Book Structure

Chapter 2 The Asset Management Industry

Asset Classes

Public Equities

Bonds (or Fixed Income)

Cash (and near cash)

Private Assets

Real Estate

Private Equity

Private Debt

Infrastructure

Natural Resources

Commodities

Derivatives

Futures

Forwards

Swaps

Contracts for Difference (CFD)

Options

Overlay Strategies

Currency

Hedge Funds

Asset Allocation

Strategic asset allocation

Tactical asset allocation.

Chapter 3 The Mathematics of Portfolio Return

Simple Return

Continuously Compounded (or logarithmic) Returns

Money-weighted Returns (MWR)

Internal Rate of Return (IRR)

Ex-ante Internal Rate of Return

Simple Internal Rate of Return

Ex-post Internal Rate of Return

Simple Dietz

ICAA Method

Modified Dietz

Time-Weighted Returns (TWR)

True Time-Weighted

Unit Price Method

Unit Price Method with Distributions

Time-weighted versus Money-weighted Rates of Return

Approximations to the Time Weighted Return

Index Substitution

Regression Method (or b method)

Analyst's Test

Hybrid Methodologies

Linked Modified Dietz

BAI Method (or linked IRR)

Which method to use?

Late Trading and Market Timing

Self-selection

Large Cash Flow

Self-selection of methodologies

Annualised Returns

Since Inception Internal Rate of Return (SI-IRR)

Modified IRR (MIRR)

Return Hiatus

Gross and net of fee calculations

Estimating gross and net of fee returns

Initial Fees

Performance Fees

Asymmetric or Symmetric

Crystallisation

Performance Fees in Practice

Equalization

Reporting Hierarchy

Overlay Strategies

Overlay performance return calculations:

Base currency and local returns

Currency conversions

Hedged Returns

Currency Overlay Returns

Perfectly Hedged Returns

Portfolio Component Returns

Money-weighted Component Returns

End of day

Beginning of day

Intra-day weighted

Differentiated

Actual Time

Rule-based

Extremely large cash flows

Which timing assumption to use for time-weighted returns?

Carve Outs

Sub-portfolios

Cash Sectors

Individual security returns

Multi-period component returns

Abnormal Returns

Short Positions

Contribution to return

Composite returns

Chapter 4 Benchmarks

Benchmarks

Benchmark attributes

The Role of Benchmarks

Types of Benchmarks

Commercial Indexes

Calculation methodologies

Aggregate Price Index (Price-weighted Index or Carli type)

Geometric (or Jevons type) Index

Market Capitalisation Index

Laspeyres Index

Paasche Index

Marshall - Edgeworth Index

Fisher Index

Equal weighted Indexes

Fundamental Indexes

Optimised Indexes (efficient or minimum variance indexes)

Fixed Income Indexes

Index Providers

Choice of Index Provider

Benchmark Regulation

Choice of Index

Currency Effects in Benchmark

Hedged Indexes

Customised Indexes

Capped Indexes

Peer Groups and Universes

Percentile Rank

Random Portfolios

Exchange Traded Funds (ETFs)

Target Returns

Blended Benchmarks (or balanced benchmarks)

Fixed Weight & Dynamised Benchmarks

Spliced Indexes

Money-weighted Benchmarks (or public market equivalents)

Normal Portfolio

Benchmark Statistics

Index Turnover

Up-capture Indicator

Down-capture Indicator

Up-number Ratio

Down-number Ratio

Up-percentage Ratio

Down-percentage Ratio

Percentage Gain Ratio

Excess return

Arithmetic Excess Return

Geometric Excess Return

Chapter 5 Risk

Definition of Risk

Risk types

Risk management v Risk control

Risk aversion

Ex-post and ex-ante

Descriptive Statistics

Mean (or arithmetic mean)

Mean absolute deviation (or mean deviation)

Variance

Bessel's correction (population or sample, n or n-1)

Sample variance

Standard deviation (variability or volatility)

Annualised risk (or time aggregation)

The Central Limit Theorem

Frequency and number of data points

Normal (or Gaussian) distribution

Histograms

Skewness (Fisher's or moment skewness)

Sample skewness

Kurtosis (Pearson's kurtosis)

Excess kurtosis (or Fisher's kurtosis)

Sample kurtosis

Bera-Jarque statistic (or Jarque-Bera)

Covariance

Sample covariance

Correlation (r)

Sample correlation

Performance appraisal

Sharpe ratio (reward to variability, Sharpe index)

Roy ratio

Risk-free rate

Alternative Sharpe ratio

Revised Sharpe ratio

Adjusted Sharpe Ratio

Skew-adjusted Sharpe Ratio

Relative risk

Tracking error (or tracking risk, relative risk, active risk)

Information ratio

Geometric information ratio

Modified information ratio

Regression analysis

Regression equation

Regression alpha

Regression beta

Regression epsilon

Capital Asset Pricing Model (CAPM)

Beta (b) (systematic risk or volatility)

Jensen's alpha (Jensen's measure or Jensen's differential return or ex-post alpha)

Annualised alpha

Bull beta (b+)

Bear beta (b-)

Beta timing ratio

Market timing

Systematic risk

Correlation

R2(or coefficient of determination)

Specific (or residual) risk

Treynor ratio (Reward to volatility)

Appraisal ratio (or Treynor-Black ratio)

Factor Models

Fama decomposition

Selectivity

Diversification

Net selectivity

Fama-French three factor model

Three factor alpha (or Fama-French alpha)

Carhart four factor model

Four factor alpha (or Carhart's alpha)

Multi-factor Models

Drawdown

Average drawdown

Maximum drawdown

Largest individual drawdown

Recovery time (or drawdown duration)

Drawdown deviation

Ulcer index

Pain index

Calmar ratio (or Drawdown ratio)

MAR ratio

Sterling ratio

Sterling-Calmar ratio

Burke ratio

Modified Burke ratio

Martin ratio (or Ulcer performance index)

Pain ratio

Partial Moments

Downside risk (or semi-standard deviation)

Downside potential

Pure downside risk

Half variance (or semi-variance)

Upside risk (or upside uncertainty)

Mean absolute moment

Omega ratio (W)

Bernardo & Ledoit (or gain-loss) ratio

d ratio

Omega-Sharpe ratio

Sortino ratio

Reward to half-variance

Downside risk Sharpe ratio

Sortino-Satchell ratio

Kappa ratio

Upside potential ratio

Volatility skewness

Variability skewness

Farinelli-Tibiletti Ratio

Prospect ratio

Fixed Income Risk

Pricing fixed income instruments

Redemption yield (yield to maturity)

Weighted average cash flow

Duration (effective mean term, discounted mean term or volatility)

Macaulay duration

Macaulay-Weil duration

Modified duration

Portfolio duration

Effective duration (or option-adjusted duration)

Duration to worst

Convexity

Modified convexity

Effective convexity

Portfolio convexity

Bond returns

Duration beta

Reward to duration

Miscellaneous Risk Measures

Hurst index (or Hurst exponent)

Bias ratio

Active Share

Value at Risk (VaR)

Risk-adjusted return

M2

M2 excess return

Differential return

Adjusted M2

Skew-adjusted M2

Types of Excess Return (or Alpha)

A Periodic Table of Risk Measures

Periodic Table Design

Why measure ex-post risk?

Which risk measures to use?

Hedge funds

Smoothing

Outliers

Data mining

Time Period

Chapter 6 Return Attribution 280

What is Attribution?

Definition

Attribution as an asset management tool

Early Development

Types of Return Attribution

Returns-based (regression or factor) Attribution

Holdings-based (or buy/hold) Attribution

Transaction-based Attribution

Arithmetic Attribution

Brinson, Hood & Beebower

Asset Allocation

Security (or Stock) Selection

Interaction

Brinson & Fachler

Interaction

Geometric Excess Return Attribution

Asset allocation

Stock selection

Sector Weights

Frequency of Analysis

Security Level Attribution

Transaction costs

Off-benchmark...