Question

1. Portfolio Performance

Discuss, in general, the performance attribution procedures.

2. International Investments

Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.

3. Hedge Funds

Explain the five major differences between hedge funds and mutual funds.

Answer 1

in general, the performance attribution procedures

Attribution analysis is a sophisticated method for evaluating the performance of a portfolio or fund manager. The method focuses on three factors: the manager's investment style, their specific stock picks and the market timing of those decisions.

Attribution analysis is a sophisticated method for evaluating the performance of a portfolio or fund manager. The method focuses on three factors: the manager’s investment style, their specific stock picks and the market timing of those decisions. It attempts to provide a quantitative analysis of the aspects of a fund manager’s investment selections and philosophy that lead to that fund’s performance.

Once an attribution analyst identifies that blend, they can formulate a customized benchmark of returns against which they can evaluate the manager’s performance. Such an analysis should shine a light on the excess returns, or alpha, that the manager enjoys over those benchmarks.The next step in attribution analysis attempts to explain that alpha. Is it due to the manager’s stock picks, selection of sectors.

performance evaluation of international portfolio managers in terms of potential sources of abnormal returns

Abnormal returns are essential in determining a security's or portfolio's risk-adjusted performance when compared to the overall market or a benchmark index. Abnormal returns could help to identify a portfolio manager's skill on a risk-adjusted basis. It will also illustrate whether investors received adequate compensation for the amount of investment risk assumed..

An abnormal return describes the unusual profits generated by given securities or portfolios over a specified period. The performance is different from the expected, or anticipated, rate of return (RoR) for the investment. The anticipated rate of return is the estimated return based on an asset pricing model, using a long run historicalaverage or multiple valuations.

Cumulative abnormal return (CAR), is the total of all abnormal returns. Usually, the calculation of cumulative abnormal return happens over a small window of time, often only days. This short duration is because evidence has shown that compounding daily abnormal returns can create bias in the results. Cumulative abnormal return (CAR) is used to measure the effect of lawsuits, buyouts, and other events have on stock prices. Cumulative abnormal return (CAR) is also useful for determining the accuracy of asset pricing model in predicting the expected performance.

The five major differences between hedge funds and mutual funds

Both mutual funds and hedge funds are managed portfolios. A manager, or group of managers, chooses securities expected to perform well, and then lumps them into a single portfolio. Investors buy portions of the fund, and they either gain or lose depending on how their holdings perform. Both types of funds provide diversification and professional management.That’s where the similarities between mutual funds and hedge funds end. Hedge funds are managed in a much more aggressive fashion. Unlike mutual funds, hedge funds take speculative positions in derivatives, and they short sell stocks. With increased leverage comes increased risk, but also the chance to gain when the market is falling. Mutual funds are safer, but they won’t take highly leveraged positions. Hedge funds are only available to accredited investors, who must meet a specific set of criteria to qualify. They are sophisticated investors with high net worth. Mutual funds are easy to purchase with minimal cash.

Hedge funds and Mutual funds are two popular pooled investment vehicles, wherein a number of investors entrust their money to a fund manager, who invest the same in different kinds of publicly traded securities. A mutual fund is an investment, that offers the investor an opportunity to make an investment in a diversified and professionally managed basket of securities, at comparatively low cost.

The main difference between the two investment avenues is that while mutual fund seeks relative returns, absolute returns are chased by hedge funds. In this article, you can find the important differences between hedge fund and mutual fund, so take a read.