Investment Performance Measurement

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.

• Foreword xiRobert R. Johnson, CFAIntroduction 1Philip Lawton, CFA, CIPM, and Todd Jankowski, CFAPart I: Overview of Performance EvaluationChapter 1 Evaluating Portfolio Performance 11Jeffery V. Bailey, CFA, Thomas M. Richards, CFA, and David E. TierneyReprinted from Managing Investment Portfolios: A Dynamic Process, 3rd Edition (John Wiley & Sons, 2007):717–780.Part II: Performance MeasurementChapter 2 Benchmarks and Investment Management 81Laurence B. SiegelReprinted from the Research Foundation of CFA Institute (2003).Chapter 3 The Importance of Index Selection 189Christopher G. Luck, CFAReprinted from AIMR Conference Proceedings: Benchmarks and Attribution Analysis(June 2001):4–12.Chapter 4 After-Tax Performance Evaluation 203James M. PoterbaReprinted from AIMR Conference Proceedings: Investment Counseling for Private Clients II (August 2000):58–67.Chapter 5 Taxable Benchmarks: The Complexity Increases 217Lee N. Price, CFAReprinted from AIMR Conference Proceedings: Investment Counseling for Private Clients III (August 2001):54–64.Chapter 6 Overcoming Cap-Weighted Bond Benchmark Deficiencies 233William L. Nemerever, CFAReprinted from CFA Institute Conference Proceedings Quarterly (December 2007):55–66.Chapter 7 Yield Bogeys 251Brent Ambrose and Arthur WargaReprinted from Financial Analysts Journal (September/October 1996):63–68.Chapter 8 Jumping on the Benchmark Bandwagon: Benchmark Methodologies Are the Subject of Vigorous Debate 259Crystal Detamore-RodmanReprinted from CFA Magazine (January/February 2004):54–55.Part III: Performance AttributionChapter 9 Determinants of Portfolio Performance 267Gary P. Brinson, L. Randolph Hood, CFA, and Gilbert L. BeebowerReprinted from Financial Analysts Journal (July/August 1986):39–44.Chapter 10 Determinants of Portfolio Performance II: An Update 277Gary P. Brinson, Brian D. Singer, CFA, and Gilbert L. BeebowerReprinted from Financial Analysts Journal (May/June 1991):40–48.Chapter 11 Determinants of Portfolio Performance—20 Years Later 289L. Randolph Hood, CFAReprinted from Financial Analysts Journal (September/October 2005):6–8.Chapter 12 Equity Portfolio Characteristics in Performance Analysis 293Stephen C. Gaudette, CFA, and Philip Lawton, CFA, CIPMReprinted from CFA Institute (2007).Chapter 13 Mutual Fund Performance: Does Fund Size Matter? 307Daniel C. Indro, Christine X. Jiang, Michael Y. Hu, and Wayne Y. LeeReprinted from the Financial Analysts Journal (May/June 1999):74–87.Chapter 14 Multiperiod Arithmetic Attribution 327José Menchero, CFAReprinted from the Financial Analysts Journal (July/August 2004):76–91.Chapter 15 Optimized Geometric Attribution 351José Menchero, CFAReprinted from the Financial Analysts Journal (July/August 2005):60–69.Chapter 16 Custom Factor Attribution 367José Menchero, CFA, and Vijay Poduri, CFAReprinted from the Financial Analysts Journal (March/April 2008):81–92.Chapter 17 Return, Risk, and Performance Attribution 387Kevin Terhaar, CFAReprinted from AIMR Conference Proceedings: Benchmarks and Attribution Analysis(June 2001):21–27.Chapter 18 Global Asset Management and Performance Attribution 397Denis S. Karnosky and Brian D. Singer, CFAReprinted from The Research Foundation of CFA Institute (February 1994).Chapter 19 Currency Overlay in Performance Evaluation 457Cornelia PaapeReprinted from Financial Analysts Journal (March/April 2003):55–68.Part IV: Performance AppraisalChapter 20 On the Performance of Hedge Funds 481Bing LiangReprinted from the Financial Analysts Journal (July/August 1999):72–85.Chapter 21 Funds of Hedge Funds: Performance and Persistence 501Stan BeckersReprinted from CFA Institute Conference Proceedings Quarterly (June 2007):25–33.Chapter 22 Hedge Fund Due Diligence: Putting Together the Pieces of the Mosaic Helps Reveal Operational Risks 513Cynthia Harrington, CFAReprinted from CFA Magazine (May/June 2003):54–55.Chapter 23 Putting Risk Measurement in Context: Why One Size Does Not Fit All 517Cynthia Harrington, CFAReprinted from CFA Magazine (March/April 2004):44–45.Chapter 24 Conditional Performance Evaluation, Revisited 521Wayne E. Ferson and Meijun QianReprinted from the Research Foundation of CFA Institute (September 2004).Chapter 25 Distinguishing True Alpha from Beta 591Laurence B. SiegelReprinted from CFA Institute Conference Proceedings: Challengesand Innovation in Hedge Fund Management (July 2004):20–29.Chapter 26 A Portfolio Performance Index 605Michael StutzerReprinted from the Financial Analysts Journal (May/June 2000):52–61.Chapter 27 Approximating the Confidence Intervals for Sharpe Style Weights 619Angelo Lobosco and Dan DiBartolomeoReprinted from Financial Analysts Journal (July/August 1997):80–85.Chapter 28 The Statistics of Sharpe Ratios 629Andrew W. LoReprinted from the Financial Analysts Journal (July/August 2002):36–52.Chapter 29 Risk-Adjusted Performance: The Correlation Correction 653Arun S. MuralidharReprinted with updates from the Financial Analysts Journal (September/ October 2000):63–71.Chapter 30 Index Changes and Losses to Index Fund Investors 669Honghui Chen, Gregory Noronha, CFA, and Vijay Singal, CFAReprinted from the Financial Analysts Journal (July/August 2006):31–47.Chapter 31 Information Ratios and Batting Averages 693Neil Constable and Jeremy Armitage, CFAReprinted from the Financial Analysts Journal (May/June 2006):24–31.Chapter 32 The Information Ratio 705Thomas H. GoodwinReprinted from the Financial Analysts Journal (July/August 1998):34–43.Chapter 33 Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? 719Roger G. Ibbotson and Paul D. KaplanReprinted from the Financial Analysts Journal (January/February 2000):26–33.Chapter 34 Fund Management Changes and Equity Style Shifts 731John G. Gallo and Larry J. LockwoodReprinted from Financial Analysts Journal (September/October 1999):44–52.Chapter 35 Managing Performance: Monitoring and Transitioning Managers 745Louisa Wright SellersReprinted from AIMR Conference Proceedings: Investment Counseling for Private Clients IV (August 2002):32–39.Chapter 36 Does the Emperor Wear Clothes or Not? The Final Word (or Almost) on the Parable of Investment Management 757Philip Halpern, Nancy Calkins, and Tom RuggelsReprinted from Financial Analysts Journal (July/August 1996):9–15.Chapter 37 Does Historical Performance Predict Future Performance? 767Ronald N. Kahn and Andrew RuddReprinted from Financial Analysts Journal (November/December 1995):43–52.Chapter 38 Evaluating Fund Performance in a Dynamic Market 785Wayne E. Ferson and Vincent A. WartherReprinted from Financial Analysts Journal (November/December 1996):20–28.Chapter 39 Investment Performance Appraisal 799John P. Meier, CFAReprinted from CFA Institute (2008).Chapter 40 Thinking Outside the Box: Risk Management Firms Put a Creative Spin on Coupling Theory with Practice 815Susan Trammell, CFAReprinted from CFA Magazine (March/April 2004):32–35.Part V: Global Investment Performance StandardsChapter 41 Global Investment Performance Standards 825Philip Lawton, CFA, CIPM, and W. Bruce Remington, CFAReprinted from Managing Investment Portfolios: A Dynamic Process, 3 ed. (John Wiley & Sons, 2007):783–855.Appendix A Global Investment Performance Standards (GIPS®) 899Reprinted from the CFA Institute Centre for Financial Market Integrity (February 2005).Appendix B Corrections to GIPS Standards 2005: Last Updated October 31, 2006 951About the Contributors 953Index 956