Volume 5 Flashcards
PM for Instit Investors
LOSa: Discuss common characteristics of Instit Investors
PM for Instit Investors
LOSb: Discuss Investment policies of Instit Investors
1) Norway Model = limited value added potential
= 60% equity/40% bonds.
Very Few AI. Largely PASSIVE.
+ 2) 3) 4)
PM for Instit Investors
Pension Funds ? (stakeholders, liabilities, main objective, funded ratio et shortfall/surplus)
PM for Instit Investors
Pension Funds ? (Inv Horizon, Liquidity Needs, regul framework, tax&accounting)
PM for Instit Investors
Pension Funds ? (risk considerations)
RT = risk tolerance
+ PLan Funded Status:
.if surplus = higher RT
.if deficit but willing to make contributions = higher RT
PM for Instit Investors
Pension Funds ? (Investment Objectives)
Risk Objective = typically forms the basis of a secondary invest objective.
stated in terms of funded status (above 100% or some minimum)
OR in terms of contributions (minimum volatility OR PV of contributions)
PM for Instit Investors
Pension Funds ? (Investment Portfolio)
PM for Instit Investors
Sovereign Wealth Funds ?
1) Budget Stabilization Funds = Short IH = very liquid (fixed income + cash), low equity, no AI
Goal = capital preservation. Invest objective = generate returns > inflation with low proba of loss.
5) Pension Reserve Funds = long IH & liability = future pension obligations (accumulation and decumulation phase = low and high liquidity needs).
Goal = earn a return sufficient to max likelihood of meeting future obligations.
PM for Instit Investors
Endowments:
Stakehodlers, Investment Horizon, Liabilities, target real return, gifts&donations, percentage of operating budget, ability to issue debt ?
PM for Instit Investors
Foundations ?
+Asset Allocation = large equity exposure, AI, lower Fixed Inc.
Smaller foundations = lower AI allocation.
PM for Instit Investors
Banks:
Stakeholders, Assets, Liabs, IH, Liquidity, Invest objective, Risk Tolerance ?
PM for Instit Investors
Insurance:
Stakeholders, Liabs, IH, Liquidity needs, Invest objective, Invest portfolio
PM for Instit Investors
Banks/Insurers Balance Sheet Management & Investment Strategy ?
TRADE STRATEGY & EXECUTION
LosA: Discuss motivations to trade and how they relate to trading strategy.
TRADE STRATEGY & EXECUTION
LosB: Discuss inputs to the selection of a trading strategy.
1) Side of order –> trending vs non-trending market
2) Size of the order –> large = mkt impact (%adv = average daily volume)
TRADE STRATEGY & EXECUTION
LosC: Compare Benchmarks for trade execution
3) Post-Trade Benchmarks = closing price, typically used by index & mutual funds.
4) Price Target Benchmarks = Set by PM
TRADE STRATEGY & EXECUTION
LosD: Select and justify a trading strategy given relevant facts.
TRADE STRATEGY & EXECUTION
LosE: Describe factors that typically determine the selection of a trading algorithm class (1/3).
Three types of approaches to trading ?
TRADE STRATEGY & EXECUTION
LosE: Describe factors that typically determine the selection of a trading algorithm class (3/3).
Within algorithmic trading, EXECUTION ALGORITHMS ?
1) Scheduled Algos:
1a) POV = Percent of Volume (participation algo) = as volume increases, algo trades more
3) Arrival Price = Appropriate for risk averse PM & liquid security < 15% ADV
4) Dark Strategies/LIquidity aggregators = min info leakage.
Appropriate for: large order size, min mkt impact, low urgency, illiquid securities
5) Smart order routers = Small mkt (urgent)/limit orders (less urgent), low mkt impact.
High urgency or no info content.
TRADE STRATEGY & EXECUTION
LosF: Contrast KEY CHARACTERISTICS of the following mkts in relation to trade implementation
1) EQUITIES ?
TRADE STRATEGY & EXECUTION
LosF: Contrast KEY CHARACTERISTICS of the following mkts in relation to trade implementation
2) FIXED INCOME ?
TRADE STRATEGY & EXECUTION
LosF: Contrast KEY CHARACTERISTICS of the following mkts in relation to trade implementation
3) EXCHANGE TRADED DERIVATIVES ?
4) OTC DERIVATIVES ?
5) FOREX ?
TRADE STRATEGY & EXECUTION
LosG: Explain how trade costs are measured, and determine the cost of the trade (1/2)
IS = implementation shortfall
TRADE STRATEGY & EXECUTION
LosG: Explain how trade costs are measured, and determine the cost of the trade (2/2
Improving execution performance & evaluation of the trade cost ?
PORTFOLIO PERFORMANCE EVALUATION
LosA: explain the following components of portfolio evaluation and their interrelationships: performance measurement, performance attribution, and performance appraisal
PORTFOLIO PERFORMANCE EVALUATION
LosB: describe attributes of an effective attribution process
PORTFOLIO PERFORMANCE EVALUATION
LosC1: contrast return attribution and risk attribution; contrast macro and micro return attribution
PORTFOLIO PERFORMANCE EVALUATION
LosC2: contrast return attribution and risk attribution; contrast macro and micro return attribution
PORTFOLIO PERFORMANCE EVALUATION
LosD1: describe returns-based, holdings-based, and transactions-based performance attribution, including advantages and disadvantages of each
PORTFOLIO PERFORMANCE EVALUATION
LosD2: describe returns-based, holdings-based, and transactions-based performance attribution, including advantages and disadvantages of each
PORTFOLIO PERFORMANCE EVALUATION
Equity Return Attribution
LosE1: interpret the sources of portfolio returns using a specified attribution approach
PORTFOLIO PERFORMANCE EVALUATION
Equity Return Attribution
LosE2: interpret the sources of portfolio returns using a specified attribution approach
PORTFOLIO PERFORMANCE EVALUATION
Equity Return Attribution
LosE3: interpret the sources of portfolio returns using a specified attribution approach
PORTFOLIO PERFORMANCE EVALUATION
Equity Return Attribution
LosE4: interpret the sources of portfolio returns using a specified attribution approach
PORTFOLIO PERFORMANCE EVALUATION
Fixed Income Return Attribution
LosF1: interpret the output from fixed-income attribution analyses
PORTFOLIO PERFORMANCE EVALUATION
Fixed Income Return Attribution
LosF2: interpret the output from fixed-income attribution analyses
PORTFOLIO PERFORMANCE EVALUATION
Equity & Fixed Income Return Attribution
LosEF1: example
PORTFOLIO PERFORMANCE EVALUATION
Equity & Fixed Income Return Attribution
LosEF2: example
PORTFOLIO PERFORMANCE EVALUATION
Equity & Fixed Income Return Attribution
LosEF3: example
PORTFOLIO PERFORMANCE EVALUATION
Equity & Fixed Income Return Attribution
LosEF4: example
PORTFOLIO PERFORMANCE EVALUATION
Equity & Fixed Income Return Attribution
LosEF5: example
PORTFOLIO PERFORMANCE EVALUATION
Risk Attribution
LosG: Discuss considerations in selecting a risk attribution approach
PORTFOLIO PERFORMANCE EVALUATION
Return Attribution Analysis at Multiple Levels
LosH1: Discuss Return Attribution Analysis at Multiple (MACRO) Levels
PORTFOLIO PERFORMANCE EVALUATION
Return Attribution Analysis at Multiple Levels
LosH2: Discuss Return Attribution Analysis at Multiple (MACRO) Levels
PORTFOLIO PERFORMANCE EVALUATION
Return Attribution Analysis at Multiple Levels
LosH3: Discuss Return Attribution Analysis at Multiple (MACRO) Levels
PORTFOLIO PERFORMANCE EVALUATION
Return Attribution Analysis at Multiple Levels
LosH4: Discuss Return Attribution Analysis at Multiple (MICRO) Levels
PORTFOLIO PERFORMANCE EVALUATION
Return Attribution Analysis at Multiple Levels
LosH5: Discuss Return Attribution Analysis at Multiple (MACRO&MICRO) Levels
PORTFOLIO PERFORMANCE EVALUATION
Liability-Based Benchmarks
LosI: Discuss uses of liability-based benchmarks
PORTFOLIO PERFORMANCE EVALUATION
Asset-Based Benchmarks
LosJ1: Discuss types of asset-based benchmarks
PORTFOLIO PERFORMANCE EVALUATION
Asset-Based Benchmarks
LosJ2: Discuss types of asset-based benchmarks
PORTFOLIO PERFORMANCE EVALUATION
Asset-Based Benchmarks
LosJ3: Discuss types of asset-based benchmarks
PORTFOLIO PERFORMANCE EVALUATION
LosK: Discuss tests of benchmark quality
PORTFOLIO PERFORMANCE EVALUATION
LosL1: describe the impact of benchmark misspecification on attribution and appraisal analysis
PORTFOLIO PERFORMANCE EVALUATION
EXAMPLE
LosL2: describe the impact of benchmark misspecification on attribution and appraisal analysis
PORTFOLIO PERFORMANCE EVALUATION
Real estate & HF
LosM1: describe the Benchmarking of Alternative Investments
PORTFOLIO PERFORMANCE EVALUATION
PE, Commo invests, Managed derivatives, Distressed securities.
LosM2: describe the Benchmarking of Alternative Investments
PORTFOLIO PERFORMANCE EVALUATION
True active return VS Misfit active return.
LosM3: describe the Benchmarking of Alternative Investments
PORTFOLIO PERFORMANCE EVALUATION
LosN1: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
PORTFOLIO PERFORMANCE EVALUATION
LosN2: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
PORTFOLIO PERFORMANCE EVALUATION
LosN3: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
PORTFOLIO PERFORMANCE EVALUATION
LosN4: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
PORTFOLIO PERFORMANCE EVALUATION
LosN5: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
PORTFOLIO PERFORMANCE EVALUATION
LosN6: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
PORTFOLIO PERFORMANCE EVALUATION
LosN7: calculate and interpret the Sortino ratio, the appraisal ratio, upside/downside capture ratios, maximum drawdown, and drawdown duration
Even from recovery = recovery to last high water mark
PORTFOLIO PERFORMANCE EVALUATION
Performance Appraisal: Capture Ratios and Drawdowns
LosN8: describe limitations of appraisal measures and related metrics
PORTFOLIO PERFORMANCE EVALUATION
Performance Appraisal: Capture Ratios and Drawdowns
LosN9: describe limitations of appraisal measures and related metrics
INVESTMENT MANAGER SELECTION
LosA: Describe the components of a manager selection process, including due diligence.
INVESTMENT MANAGER SELECTION
LosB1: Contrast type 1 and type 2 errors in Manager hiring, and continuation decisions
INVESTMENT MANAGER SELECTION
LosB2: Contrast type 1 and type 2 errors in Manager hiring, and continuation decisions
INVESTMENT MANAGER SELECTION
Style analysis ??
LosC1: Describe uses of returns-based and holdings-based style analysis in investment manager selection
INVESTMENT MANAGER SELECTION
Returns-based style analysis a) ??
LosC2: Describe uses of returns-based and holdings-based style analysis in investment manager selection
INVESTMENT MANAGER SELECTION
Returns-based style analysis b) ??
LosC3: Describe uses of returns-based and holdings-based style analysis in investment manager selection
INVESTMENT MANAGER SELECTION
Holdings-based style analysis a) ??
LosC4: Describe uses of returns-based and holdings-based style analysis in investment manager selection
INVESTMENT MANAGER SELECTION
Holdings-based style analysis b) ??
LosC5: Describe uses of returns-based and holdings-based style analysis in investment manager selection
INVESTMENT MANAGER SELECTION
LosD: describe uses of the upside capture ratio, downside capture ratio, maximum drawdown, drawdown duration, and up/down capture in evaluating managers
INVESTMENT MANAGER SELECTION
Investment philosophy a) ?
LosE1: Evaluate a manager’s philosophy and investment decision-making process
INVESTMENT MANAGER SELECTION
Investment philosophy b) ?
LosE2: Evaluate a manager’s philosophy and investment decision-making process
INVESTMENT MANAGER SELECTION
Investment philosophy c) ?
LosE3: Evaluate a manager’s philosophy and investment decision-making process
INVESTMENT MANAGER SELECTION
Investment personnel ?
LosE4: Evaluate a manager’s philosophy and investment decision-making process
+ what is the level of key person risk
+ what kinds of agreements and incentives exist to attract and retain employees
+ what has been the turnover
INVESTMENT MANAGER SELECTION
Investment decision-making process a) ?
LosE5: Evaluate a manager’s philosophy and investment decision-making process
INVESTMENT MANAGER SELECTION
Investment decision-making process b) ?
LosE6: Evaluate a manager’s philosophy and investment decision-making process
INVESTMENT MANAGER SELECTION
Individual separately managed accounts ?
LosF1: Evaluate the costs and benefits of pooled investment vehicles and separate accounts
other disadvantages:
- tracking risk (if SMA is customized ) = performance will reflect investor constraints, it makes attribution messy
- investor behavior = attempts to manage the account, which negates the benefit of hiring a manager
INVESTMENT MANAGER SELECTION
Pooled or comingled vehicle ?
LosF2: Evaluate the costs and benefits of pooled investment vehicles and separate accounts
advantages and disadvantages = inverse of SMA
INVESTMENT MANAGER SELECTION
Liquidity a) ?
LosG1: compare types of investment manager contracts, including their major provisions and advantages and disadvantages
INVESTMENT MANAGER SELECTION
Liquidity b) ?
LosG2: compare types of investment manager contracts, including their major provisions and advantages and disadvantages
+ Other LP (limited partnerships) disadvantages:
- funds can hold less liquid securities with reduced risk of having to sell at inopportune times
- removes investor’s potential for overreaction during times of market stress
INVESTMENT MANAGER SELECTION
Mgmt fees, AUM fee ?
LosG3: compare types of investment manager contracts, including their major provisions and advantages and disadvantages
INVESTMENT MANAGER SELECTION
Performance fee a) ?
LosH:describe the three basic forms of performance-based fees
Losi: analyze and interpret a sample performance-based fee schedule
INVESTMENT MANAGER SELECTION
Performance fee b) ?
LosH:describe the three basic forms of performance-based fees
Losi: analyze and interpret a sample performance-based fee schedule
INVESTMENT MANAGER SELECTION
Performance fee c) ?
LosH:describe the three basic forms of performance-based fees
Losi: analyze and interpret a sample performance-based fee schedule
