Knowledge Base
Assess absolute and relative fund performance
Which quantitative criterion is considered a favourable signal for satisfactory performance?
From a quantitative standpoint, a Sharpe ratio above 1, a positive alpha over the recommended horizon, and an information ratio above 0.5 are considered favourable signals.
Which method is used to evaluate the absolute performance of open-ended UCITS according to GIPS standards?
The absolute performance evaluation methodology favours the time-weighted return (TWR) method for open-ended UCITS. This method breaks down the evaluation period into sub-periods delimited by capital flows, calculates the return for each sub-period, then geometrically chains these returns. The general formula is: TWR = [(1 + HPR₁) × (1 + HPR₂) × ... × (1 + HPRₙ)] - 1.
Which method is required by regulation to evaluate the absolute performance of closed-end funds such as private equity?
For closed-end funds such as private equity or real estate, the money-weighted return (MWR) method, equivalent to the internal rate of return (IRR), is required by regulation. This method takes into account the timing and size of cash flows.
Which indicator measures the volatility of the difference between a fund's return and its benchmark's return?
The tracking error measures the volatility of the difference between a fund's return and its benchmark's return. Calculated as the annualised standard deviation of relative performance, it quantifies the degree of freedom taken by the manager.
TWR formula
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The general formula for TWR is: TWR = [(1 + HPR₁) × (1 + HPR₂) × ... × (1 + HPRₙ)] - 1, where HPR represents the holding period return for each sub-period.
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Items to categorize:
Absolute performance for open-ended UCITS
Absolute performance for closed-end funds
The time-weighted return (TWR) method is used for open-ended UCITS, while the money-weighted return (MWR) method is used for closed-end funds such as private equity or real estate.
An information ratio above 0.5 indicates inefficient active management.
An information ratio above 0.5 indicates efficient active management. The information ratio relates the annualised outperformance to the tracking error, thus evaluating the efficiency of active risk-taking.
AMF Instruction DOC-2011-24 requires that reported performance figures be gross of fees.
AMF Instruction DOC-2011-24 requires that reported performance figures be net of fees, compared against an index calculated with dividends reinvested, and accompanied by an explicit mention of periods of underperformance.