Handling the Use of Derivatives in Performance Attribution
Portfolio managers must make many practical decisions when employing a performance attribution methodology that can reveal key insights about the success of their investment strategies.
While measurement tools tell us how a portfolio performed, attribution aspires to explain how the manager’s return was achieved
For portfolios managed to a benchmark, allocation differences are the sources of management value added over the benchmark return. Selecting an attribution approach that reflects how the portfolio is being managed can efficiently explain the impact of the manager’s decisions.
This article, authored by Bruce J. Feibel, State Street AlphaSM Platform Manager, and published in the summer 2022 edition of The Journal of Derivatives, demonstrates techniques for analyzing and attributing portfolio performance when futures, forwards, options and swaps are used to modify portfolio exposures. It also explains why such methods for processing derivatives exposures are beneficial to investment portfolio performance and accurately reflecting the portfolio managers’ objectives.