3m libor benchmark - convention performance reporting

CFA Level III Portfolio Management
#1

Hello I’m wondering how to calculate the daily returns of a 3m libor benchmark (for absolute return type funds, which are benchmarked against libor + X, and where libor is usually 3months. There is typically a performance fee, calculated quarterly). Since this is a 3months return, how do you compound it ? (the fund has daily liquidity). It’s not trivial to me why 3m libor is an appropriate benchmark for funds with daily liquidity. Should it be 1d return = (1+rate)1/360 - (ratet - ratet-1) * 0.25 ? Thanks

#2

anyone has an idea ?

#3

LIBOR is quoted as a nominal rate, but you need an effective rate.

So, first we get the effective 3-month rate (ETMR):

ETMR = 3-month LIBOR × 90/360

From this, we compound to get the effective daily rate (EDR):

1 + EDR = (1 + ETMR)1/90

#4

Thank you!!

#5

You’re welcome.