Portfolio performance

Portfolio performance

1. benchmarks

   • establish long-term neutral position of portfolio
   • overweight (if positive)
   • underweight (if negative)
   • comparison - to evaluate performance of manager

2. Sharpe ratio

   • limitations
     • incorporates performance of underlying markets
     • assumes volatility is an appropriate measure of risk
     • assumes SD normal distributions
       • skew / kurtosis
       • could underestimate risk of poor returns
   • higher is better
   • longer time-frame is better
   • a measure of risk-adjusted returns
   • looks at return over and above risk-free rate in units of SD

3. alternative investments

   • diversification
     • 2008:alternative assets fell broadly in line with equities
   • imperfect correlation with equities, bonds & cash
     • smooths overall returns
   • commercial property
     • higher income than equities
     • inflation hedge
   • absolute return
     • perform better than long-only when markets are weak
     • 2008: still did not achieve positive returns
     • generally deliver low but positive returns
     • onshore
       • regulated
         • investor protection
       • more transparent
       • UCITS III
         • able to adopt some but not all hedge fund strategies
           • leverage and shorting using derivatives
           • overall risk restrictions
         • must retain liquidity for redemptions
     • absolute vs relative return
     • trade at NAV
   • liquidity issues (2008)
     • commercial property
       • suspended redemptions
       • discounts to NAV
     • hedge funds
       • defer payouts
       • 'gates' limiting outflows
       • 'side pockets' to hold illiquid securities
   • FOHF
     • fees to FOFH manager
     • can trade at discount to NAV

4. passive investment / ETF

   • advantages
     • major markets are largely efficient
       • difficult to consistetly outperform via active management
     • majority of active funds fail to outperform index over medium/long term
     • low buying / running costs
       • lower TERs than active funds
     • ETFs trade throughout market opening hours
     • total return swaps tax advantage over dividend paying funds
       • counterparty risk
     • no stamp duty on ETFs
     • exposure to wide range of indices / assets
       • leverage
       • inverse indices
   • types
     • physical assets
     • derivatives
       • counterparty risk

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