With in a asset management world, quantitative analysis or Quants involves analyzing the returns, risk and characteristics of securities. Market and portfolios .As one might imagine, this is a hugely complex and demanding field, not least because of the huge amounts of accurate data that is required to provide performance and risk analyses. Quants teams not only provide performance and risk analyses.

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Quants teams not only provide data for internal management purpose but also for external consumption. This includes analysis for the fund’s Trustees and Clients on each fund’s performance, turnover and risk. It is obviously absolutely key that the figure produced are of the highest possible accuracy, other wise the asset management firm could be liable to FSA sanction for misrepresentation. Because of the requirement for accuracy and the complex tasks involved, Quants staffs are often qualified to actuarial standard.

Performance Analysis:

It is basically falls in to two categories: return calculations and performance attribution, performance return calculations and performance attributable to the fund manager’s actions. Attribution takes performance analysis to a more detailed level and seeks to explain the performance of the fund manger by analyzing the fund’s return and breaking it down in to different risk categories impacting the fund . Thus performance return calculation tells us what the performance was, whist performance attribution analysis tell us why the figures were good or bad.

Performance Return:

The Return calculation is fairly straight forward. It is however important to ensure that the figure calculate reflects the fund mangers’ decision making and judgment, and not external events beyond his control. In general, changes to the portfolio’s value can occur for the following Reasons.

Change	Source of Change	Fund Manager Action?
Prices of Securities in Fund	Market Forces	Yes
Coupon	Security Holding	Yes
Right Issue	Security Holding	Yes
Scrip Issue	Security Holding	Yes
Capital Inflow / out Flow	Client Decision	No
Fund Management	Asset Manager	No

In order fairly to asses the fund manager’s performance, it is obviously important to ensure that items not under his control are excluded from the performance return. Thus a huge capital inflow should have no effect on the performance figure reported. More subtle refinements to the measurement of return, such as attempting to eliminate the effects of the timing of a particular cash flow, are covered later.

How can one assess whether a fund’s return is good, bad or indifferent? This first step is to compare the fund’s step is to compare the funds return to that of its benchmark. The fund’s benchmark performance is generally calculated from changes in the value of the indices underlying the bench mark. Ideally, these indices would be provided at stock level in order to give the greatest flexibility in performance reporting; how ever, data is not always available to this level of granularity.

In order to calculate the benchmark return, two elements usually need to be combined, these being the top level benchmark ‘split’ and the percentage change in the underlying indices. Let’s assume that a benchmark had been set by the trustees to be 75% equalities and 25% bonds, ad the underlying indices were specified as being the MSCI world index to represent equities and the JP Morgan Government Bond index to represent bonds. The benchmark performance for a single period would be calculated in the following way:

Index	Index weight (from split )	Index Level start	Index Level End	Index Level	Bench Return
MSCI World	75%	300.00	330.00	10%	7.5%
JP Morgan	25%	240.00	208.00	-15%	-3.75%
Total	100%				3.75%

If Performance is required for more than one period , the returns for each period can be Chain linked using the standard geometric calculation :

Return = { (1+ return ) x ( 1+ Return ?)x …etc } -1

This data can then be used to calculate the relative performance of the fund against the benchmark. The calculation of the fund’s performance needs to take accounts of those items. That are not under the control of the fund manager. In order to achieve this modified Dietz return calculation is generally used

‘Return = Fund value + Income – cash flow – fund value
______t= 1 _________________________________
Fund Value t=0

A general time period is used, since this calculation can be used for any periodicity and then chain linked as above. We can now calculated the relative return of the fund to its benchmark (generally simply by subtracting the bench mark performance from the fund performance), which gives a measure of how well the fund manager has done.

Performance Attribution:

Having calculated the return of the fund, the next level of details normally required by fund mangers, trustee and increasingly clients, is a breakdown of the sources of the performance of the fund. Attribution essentially provides an analysis of what fund mangers are relatively good at, i.e. which influences on his fund he is good at forecasting. We should be able to see whether, for example, an equity fund manger’s relative returns come mainly from selecting the best performing markets or whether they come from picking the best performing stocks.

Since there are a large of different influences on the value of a portfolio, attribution can be carried out in an enormous variety of ways, it is important that attribution is carried out in the way that decisions regarding investment in the fund are carried out. If attribution is carried out in some other way, the result will be best meaningless and at worst very misleading.

Fixed Interest Performance Analysis:

Fixed interest return calculation and attribution is carried out in much the same way, but naturally using attributes relevant to fixed interest investment, such as yield curve allocation. Fund managers can also take an overall long position against the bench mark, the effect of which can be calculated. Since fixed interest portfolios are constantly changing, attribution analysis Is only really meaningful for the length of time that a strategy is in place. These trades are generally in place for fairly short period.

Data Issues:

The bane of quantitative analysts live in the sourcing and preparation of the data required to carry out performance analysis. Problem include the following

· Non – availability of the correct level of transaction data, eg Income entitlements and receipts being linked to underlying securities.
· Benchmark Adjustment, such as those required to maintain Benchmark position with in fixed ‘top level ‘% splits and adjusting calculated benchmark.
· Having to adjust for publishes performance figures, i.e. where performance figures have been released, and are subsequently found to be in correct.

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