Performance measurement of asset management risk-based
Performance measurement should not be confined to assessing only the yield of the Fund, but should also include other elements of funds, which will be of interest to investors, such as measures of risk. Some other aspects are also part of the effectiveness evaluation: needs assessment, did the Manager achieve his goals or whether profitability is high enough to take certain risks; the effectiveness is correlated with the same index in the same funds, and, finally, were the results of portfolio management are associated with good luck or skill of the Manager.
The need to answer all these questions led to the development of more sophisticated performance indicators, many of which are contained in modern portfolio theory. Modern portfolio theory established the quantitative link that exists between portfolio risk and return. In the Model, estimates of fixed capital (Capital Asset Pricing Model, CAPM) developed by Sharpe in 1964, it was highlighted the notion of rewarding risk and produced the first performance indicators adjusted for risk ratios (Sharpe ratio, information ratio) or distinctive profit compared with estimates (alpha is the residual return of the portfolio that is not dependent on market movements). The Sharpe ratio is the simplest and best known performance measure. It measures the portfolio return over the risk-free rate compared with the total risk of the portfolio. This measure is said to be absolute, since it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation performance of the market in which the Manager builds the portfolio. The coefficient information is a more General form of the Sharpe ratio where the riskless asset is replaced by the reference portfolio. This measure is relative, as it evaluates the results of the portfolio with reference to a benchmark, making the result strongly dependent on the choice of benchmark.
Portfolio alpha is obtained by measuring the difference between the profit of the analyzed portfolio and reference portfolio. This measure seems to be the only reliable performance measure to evaluate active management. Actually, we have to distinguish between normal profit, secure a fair reward for portfolio exposure to different risks and the profit obtained through passive management, from malfunctioning (or when the performance limits are) due to Manager skill (or luck), or by timing the market, stock selection or good luck. The first component is related to allocation and style investment solutions that can’t are under the exclusive control of the Manager, and depend on the economic context, while the second component is the evaluation of the success of the solutions Manager. Only the latter, measured by alpha, allows you to assess the true performance of the Manager (but only if you assume that any superior performance is due to skill and not luck).
The portfolio return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio return of only a market index as the only factor. However, it quickly becomes clear that one factor is not enough to explain good or bad is the performance of the portfolio therefore should be considered other factors. Multivariable models were developed as an alternative to the CAPM and allow a better grasp of portfolio risk and provide a more accurate assessment of portfolio performance. For example, Fama and French (1993) identified two important factors that characterize the risk of the company in addition to market risk. These factors – the coefficient of Book-to-market (carrying value of shares market value of shares) and company size, as measured by its market capitalization. Therefore, Fama and French proposed a three-factor model to describe portfolio normal profits (three-factor model Fama – French). Carhart (1997) proposed to add momentum as a fourth factor to account for the constancy of short-term profit. Also of interest to measure performance is a model of style analysis proposed by Sharpe (1992), in which factors are style indices. This model provides an assessment for each portfolio using a linear combination of style indices that best replicate the style distribution portfolio and lead to an accurate evaluation of portfolio alpha.