High-Frequency Performance Monitoring

Abstract

Improvements in technology and increasing emphasis on performance have led many investors to monitor the performance of fund managers on a high–frequency basis: quarterly, monthly, or more frequently. The authors examine the impact that frequency of performance measurement has on the probability distribution of observed outcomes. With more frequent monitoring of rolling returns, there is a greatly increased probability of observing seemingly extreme observations. The authors demonstrate that if performance is appraised by focusing on returns to date, it is important to adjust the definition of extreme performance for the frequency with which returns are monitored. Failure to do so may lead to costly actions such as strategy revisions or manager terminations, which increase transaction costs and have detrimental effects on manager incentives.