Quantitative analysis looks at the performance, risk and correlation of the funds using the following methods of:
Performance – Although past performance is no indicator of future performance, Probability Distributions and Value-at-Risk models are useful in determining how funds should perform relative to an appropriate benchmark. Static and rolling returns are scrutinized and special attention is paid to performance in negative markets. The effect of tax is considered where applicable.
Risk – To determine the overall risk of a fund we look at volatility (Standard Deviation, Downside Deviation) and other well-known risk ratios (Sharpe, Treynor, Information Ratio), where applicable. These measurements are analyzed on a static and rolling basis (Snail-Trail analysis) to determine if there have been significant changes in the funds‟ risk characteristics, e.g. a new fund manager may change portfolio risk as a result of a different management style.
Drawdown Analysis – A fund’s drawdown – the maximum cumulative loss over any period – is analyzed to determine the effectiveness of a fund in protecting capital when the market loses value. This is particularly useful in the Absolute Return and Equity categories where defensiveness is an important consideration.
Correlation – A correlation matrix is used to determine the behavior of funds relative to other funds in the same sector and to various indices. Knowing how funds perform relative to each other helps to determine which funds should be combined to build a well-diversified portfolio. Qualitative analysis looks at the asset management house; the investment team and the philosophy and process behind the management of the fund.
Attribution Analysis – Attribution analysis is useful in determining the funds source of alpha. We determine whether the relative performance over time is due to sector rotation, asset allocation or stock selection.