New Managers March 2012

Peter Urbani' Statistics
Peter Urbani's quantitative analysis of emerging managers' performance

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Opalesque Emanagers Index Easily Replicable With Relatively Low Tracking Error Peter Urbani

One of the recommendations of The Association for Investment Management and Research (AIMR), now part of the CFA Institute, with respect to its guidelines for benchmarks is that they be replicable.

With this in mind, we this month attempt to recreate the Emanagers index using the Opalesque Emerging Managers database. The Index is equally weighted with notional new money pro-rated to new funds as they enter the index.

Based on the available underlying data and bearing in mind that the index is retroactively updated each month, we were able to recreate the index returns with a tracking error of 3.33% or -33 basis points per annum to the actual index compound annual return (CAGR) of +16.55%.

We then performed a four moment risk and return attribution analysis, which incorporates the effects of the higher order moments ( skewness and Kurtosis ) via the calculation of co-skewness and co-kurtosis matrices, on the ex post performance of the Index portfolio.

Extrapolating the cone of uncertainty into the future based on the underlying statistics of this calculation suggests an expected return of +9.96% over the next 12 months.

Two caveats here are obviously that this is based entirely on past performance and ......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.