Performance attribution is well standardized within fund management, due to modern portfolio theory. However, the rewards made to senior executives are a much more subjective topic. Bonuses and salaries are negotiated on a person-to-person basis and vary from one institution to the next. The same tools used in the fund industry to measure performance may also be used to assess added-value generated by senior managers and executives within financial institutions. This text demonstrates how this can be done and should allow general managers to start using modern portfolio theory to reward their staff. It provides a common framework to benchmarking as well as theoretical tools to design and refine benchmarks whilst maintaining an understanding of the specifics of different sectors.



Book Info

Breakthrough approach to evaluating management performance offers institutions an extraordinarily powerful tool for gauging compensation and aligning executive behavior with the goals of the firm.



Table of Contents

1. From performance presentation to attribution: a long hard ride.

Introduction. Presentation standards. Verification. Performance attribution.



2. VaR versus tracking error: the strengths and weaknesses of two performance measures.

Introduction. Definitions of VaR and TE. Theoretical justifications. Temporal aggregation. Active management and tracking error underestimation. Skewness and non-normality. Derivatives. Other related issues. Extreme value theory. Copulas. Conclusion.



3. VaR management with futures and options: comparing efficiency.

Specifics in futures and options trading. Hedging with futures. Hedging with options. Comparing efficiencies of futures and options usage. Use of futures and credit risk. Conclusion.



4. Stop-loss and investment returns.

Introduction. Random walk and well known theoretical results. Serial dependencies and conditional stop-losses. Empirical results in financial markets. Conclusion. Appendix 4.1.



5. The impact of solvency measures on pension fund investment strategy-the minimum funding requirement case.

Introduction. Description of Minimum Funding Requirement. Implications of the MFR for investment strategies. Modeling MFR position. Other asset classes. MFR review and proposed changes. Summary and conclusions. Appendix 5.1: Model pension fund. Appendix 5.2: Projection methodology. Appendix 5.3: Stochastic model.



6. Integrating active currency management in performance measurement issues.

Introduction. Evolution in performance measurement and attribution regarding currencies. Currency risk measurement considerations. Currency overlay, benchmarks and currency hedged indices. Picking the right benchmark is just as important as selecting the right manager. Optimization or efficiency of the currency benchmark. Analysis of an active currency overlay program against different benchmarks and with varying hedging band constraints. Conclusion.



7. A portfolio-based approach to applying and evaluating currency forecasts: CSFB's recommendations and past performance.

Introduction. Motivation and methodology. Portfolio allocations based on current forecasts (for December 2000). Historical backtesting: evaluating CSFB forecasts of the past three years (September 1997-November 2000). Comparison with other currency trading strategies. Conclusion.



8. Is a currency adviser value for money?

Introduction. Trading style. Risk control and money management. Actual trades. Performance analysis. Conclusion.



9. Making sense of hedge fund returns: a new approach.

Introduction. Cluster analysis of hedge funds returns. Economic factor analysis: index level. Economic factor analysis: individual funds. Benchmarking manager performance: returns to manager selection. Conclusion. Appendix 9.1.



10. Risk, return and the degree of total leverage in a multiple-product industry.

Introduction. Applying a degree of total leverage framework to a multiple-product industry. Data from the US commercial banking industry. Measuring risk and return in our framework. Regression tests. Conclusion.



11. Proprietary trading, how it can add value.

Introduction. Dilemmas. The structure. The right balance. Benchmark percentages and hurdles. Protect the shareholders' capital. Upside potential. Management. Being the hub and not a forgotten satellite. Conclusion.



12. Incentive fees, rewards for risk or return?

Introduction. Assumptions. Single period. Frequency. Number of managers. New high rule. Application to the Dow Jones. Extension to investment banking. Conclusion.



13. Looking beyond the CEO: executive compensation at banks.

Introduction. Related empirical literature. Components of compensation. The pay-performance relationship. Discussion. Conclusion.



14. Incentivizing insurance executives.

Introduction. Incentive pay. Non life insurance-some characteristics. Incentive issues in insurance. Incentive design. Conclusion. Appendix 14.1.



Index.