Attributing Returns Across Daily Rebalanced Strategies
Summary
The document compares ways to explain a daily rebalanced portfolio’s realized performance by its component strategies. One approach measures each strategy’s actual contribution, but that result can depend on how the other strategies performed along the path. Another calculates each component’s standalone return and rescales the contributions so they sum to the portfolio’s realized return.
A suggested alternative is to regress composite returns on component-strategy returns, constraining the component weights to sum to one and stay between zero and one. The responses also stress matching the compounding interval to the rebalance frequency and accounting for transaction effects. For infrequently rebalanced portfolios, a one-period attribution may be adequate if costs and within-period rebalancing are negligible and average weights approximate holdings. The document offers methods and assumptions, but no empirical comparison establishing that one attribution method is generally preferable.
Key ideas
- Actual component contributions can depend on the performance path of the other strategies.
- Standalone strategy returns can be rescaled to reconcile with realized portfolio performance.
- A constrained regression can estimate component shares that sum to the whole portfolio.
- Attribution frequency should match the portfolio’s compounding and rebalancing frequency.
- One-period attribution relies on negligible transaction costs and limited within-period rebalancing.
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Full text
# How to compute performance attribution between daily rebalanced strategies? # How to compute performance attribution between daily rebalanced strategies? I have a daily rebalanced portfolio of several strategies. After one month, I now want to attribute the performance to the different strategies. There are several ways to do it. For instance one could compute what each strategy has actually contributed. But it is not always fair as it is dependent on the path of other strategies. Or one could compute the theoretical performance of each strategy as if it was standalone and then rebase it so that the sum of the contribution is equal to the actual realised performance. Any other idea, or any preference between the two? ## Answer by Ram Ahluwalia (score 9) https://quant.stackexchange.com/a/2904 Perform a returns analysis by regressing the returns of your composite strategy on the returns of the component strategies. Constrain the beta coefficients to sum to 100% and bound them from 0 to 1. You will then have the % explained by each component. ## Answer by Suminda Sirinath S. Dharmasena (score 1) https://quant.stackexchange.com/a/2934 If you are using the Bisons model the frequency of compounding should be as much as the the rebalance frequency of the portfolio. In your case to get meaningful results you will need to use daily compounding. One this to be careful is that you must take transaction effect into account when calculating the return. If you are using a software like FactSet it has the option to set frequency as well as to take transaction effect into account. If you want to do the calculations your self see these 2 references. http://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/EquityPerformanceAttributionMeth.pdf http://www.mscibarra.com/research/articles/2010/Beyond%20Brinson%20Establishing%20the%20Link%20Between%20Sector%20and%20Factor%20Models%20(Apr%202010).pdf In case the portfolio is not balanced frequently (not in your case) you can do a one period attribution in excel it self without compounding. Assumptions: transaction costs are negligible within the period, there is no rebalancing or rebalance is negligible within the period thus the average weights represent the holdings approximately.
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