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Performance Attribution: Measuring Dynamic Allocation Skill

By Jason C. Hsu, Vitali Kalesnik and Brett W. Myers


Classical performance attribution methods do not explicitly assess managers ’ dynamic allocation skill in the factor domain. The authors 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. t the end of 2008, there were more than 8,000 mutual funds in the United States, with $10 trillion in assets under management (AUM). Of these funds, approximately 80 percent were actively managed. 1 A In the same year, around 9,000 U.S. hedge funds had $3 trillion in actively managed assets. Although some studies have cast doubt on the ability of the average active manager to consistently “beat the market, ” investors are nevertheless willing to entrust considerable sums of money to active management. Therefore, identifying skilled active managers is an important goal for many investors. The last few decades have seen the introduction of numerous evaluation methodologies that characterize portfolio performance and identify talented active managers. The simplest of these methodologies is return-based regression analysis, such as the one predicated on the Fama and French (1992, 1993) three-factor model. With only return information, regression analysis can identify style tilts and estimate risk-adjusted alphas for managers. But although regression analysis requires few inputs, it also provides limited insight into sources of managerial performance. Holdings-based attribution can provide a more detailed analysis of manager performance, but the input required is significantly more substantial than that required by standard regression analysis. Originally proposed by Brinson and Fachler (1985) in their study of manager skill in allocating to different industries, holdings-based attribution analysis has Jason C. Hsu is an adjunct professor at the UCLA Anderson School of Management and chief investmen

Year: 2011
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