Industry thought leadership from Siliski and Bradford leads to a world first by Eagle Investment Systems

In the first quarter of 2018 the Advisory Board of The Journal of Performance Measurement® (JPM) announced that the recipients of the annual Peter O. Dietz Award were Daryl Bradford, CFA, CIPM of Acadian Asset Management and Daniel Siliski, CAIA of Boston Partners Global Investors. The advisory board panel selected “Performance Drawdowns in Asset Management: Extending Drawdown Analysis to Active Returns” as one among a select group of articles chosen to recognize excellence in performance measurement literature. In the paper, the authors explain, active drawdown, or benchmark relative drawdown, is a natural extension of the performance drawdown calculation. The article considers several possible methodologies for calculating active drawdown, proposes one methodology as the most adequate, and applies the methodology to the returns of indices and mutual funds to derive practical results. Investors can use active drawdown to analyze portfolio returns, evaluate investment strategies, and inform the manager selection process.

Mr. Bradford and Mr. Siliksi will present their winning article at PMAR West, on October 17th & 18th in San Diego, California. As a testament to continuous improvement and dedication to deploying industry leading ideas with great velocity, Eagle Performance now includes the algorithm outlined by these award winning authors and will be available for demonstration at Eagle’s booth at PMAR West.

The enhancement is slated for wider release at the beginning of November 2018, along with functional enhancements to the Eagle Performance solution.

What is an Active/Relative Drawdown and Benchmark Calmar Ratio?
A Maximum Drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period. Drawdowns and Maximum Drawdown are standard investment performance measures used by portfolio managers for reporting and analysis. These measures are also used to support asset allocation and by consultants in the process of manager selection and performance monitoring. Active/Relative drawdown is an extension to the process of performance drawdowns.

Benchmark Calmar ratio is an extension to the regular Calmar ratio used to evaluate the performance of the hedge fund managers absolute return strategies. Relative Calmar ratio can be used with investment performance fee calculations using high watermark for relative strategies.

The importance of Active Drawdown and Benchmark Relative Calmar ratio
Money managers are often closely tied to their stated benchmarks as many asset owners and investment consultants make their manager selection and base decisions on benchmark relative performance. The active drawdown and Calmar ratio are important to help to analyze the difference in timing of negative returns relative to an investment and its benchmark. As there is always a position relative to a benchmark, the article recommendation for active drawdown demonstrates thought leadership which Eagle embraces.

Any investment strategy targeted toward lowering the dispersion or tracking error of an investment versus benchmark leads to a need for well-defined and well understood measures of relative risk and performance. An example would be passively managed high dividend yield stocks that are underperforming the dividend yield benchmark.

Risk limits such as maximum value at risk, drawdown, net and gross exposures are established measures that provide a hand-shake between the asset allocators and the active investment managers. This is especially true for hedge funds, global macro strategies, and market neutral strategies.

Sharpe ratio is an absolute measure of the risk adjusted performance and the information ratio is its benchmark counterpart that extends its application to the benchmark relative strategies. Wide acceptance of these ratios in the financial services profession demonstrates the usefulness of both absolute and relative formulations in investment performance measurement and analysis. The extension of drawdown to active returns is a welcome addition.

The Calmar ratio is frequently used to evaluate hedge fund managers and their compensation, typically arrangements that include a fixed fee and an incentive fee that is subject to a high-water-mark clause. The result is that hedge fund managers will strive to keep drawdowns to a minimum. Doing this comparison on a relative basis is meaningful if the benchmark is predefined or against a peer group manager.

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