Misfit Risk & Return - How To Interpret?

CFA Level III
#1

I’m trying to fully understand Misfit Risk and Return. I understand that: Misfit Return = Manager’s Benchmark - Market Benchmark What exactly does Misfit risk measure, how is it calculated? Need some explanation on this. Also, if Active Return = 10% and Misfit Return = -5%, what is that saying about performance in general? That the manager compared to his most appropriate benchmark performed well but against the general market was negative? What other conclusions can be inferred from this?

#2

active return = HIS return - MY benchmark true active return = HIS return - HIS benchmark misfit return = HIS bencharmk - MY benchmark active return = true active return + misfit return example, extreme case: ok, he did 10% better than s&p500, great… but wait, he did it because his portfolio is completely invested in tech stocks. his better performance comes from the difference between nasdaq100 (for example) and s&p500, not because he is a good manager

#3

“example, extreme case: ok, he did 10% better than s&p500, great… but wait, he did it because his portfolio is completely invested in tech stocks. his better performance comes from the difference between nasdaq100 (for example) and s&p500, not because he is a good manager” …Then the S&P is not the appropriate benchmark to measure against, right? If the appropriate benchmark is chosen in the first place then there would be no misfit risk/return. why even bring an incorrect benchmark into the equation in the first place?

#4

Ok…If I manage a multi-manager fund for a foundation say with 2 managers a LCV manager and a LCG manager with the overall fund indexed to the S&P 500. The Appropriate benchmark to evauated the LCV manager will be the R1000V and teh LCG will be the R1000G say, but to evaluate the overall portfolio the foundation uses the S&p500, so we have Misfit returns and True returns.

#5

Thanks, makes sense.

#6

True, it’s totally Normal Misfits are normally benched

#7

MGG, you should trademark it :slight_smile:

#8

I had better not see that in Schweser next year!!!

#9

PJStyles Wrote: ------------------------------------------------------- > I’m trying to fully understand Misfit Risk and > Return. I understand that: > > Misfit Return = Manager’s Benchmark - Market > Benchmark > > What exactly does Misfit risk measure, how is it > calculated? Need some explanation on this. Also, > if Active Return = 10% and Misfit Return = -5%, > what is that saying about performance in general? > That the manager compared to his most appropriate > benchmark performed well but against the general > market was negative? What other conclusions can > be inferred from this? This is my interpretation: Misfit return = Manager benchmark - Investor benchmark On your second question - it means out of the total active return of 10%, 5% is due to his benchmark is below the investor benchmark (i.e. “misfit”).