Adjusted Factor-Based Performance Attribution

Abstract

Factor-based performance attribution is frequently used in the asset management industry in both understanding and assessing the management of a portfolio. Unfortunately, in many cases the inferences from a standard attribution report can be misleading. One cause of this is the misclassification of factor contributions as asset-specific contributions or vice versa, due to missing factors or biased factor exposure estimates. The authors propose an adjusted factor-based performance attribution methodology that corrects for some types of biases by shifting the portion of the asset-specific contribution that is correlated with the factor contributions back into the factor portion. The authors find that, from a practical perspective, the proposed methodology results in more intuitive attributions that provide stronger support of factor-based investment mandates.

TOPICS: Analysis of individual factors/risk premia, manager selection, portfolio management/multi-asset allocation