Performance Attribution : Measuring Dynamic Allocation Skill

Classical performance attribution methods decompose manager alpha into factor allocation and stock selection components. A manager can produce alpha through factor tilts relative to a benchmark and by stock selection within each factor. However, traditional attribution methods do not explicitly assess a manager's dynamic allocation skill in the factor domain. We propose a generalized framework for performance attribution that decomposes the allocation effect into value-added from both static and dynamic factor exposures and thus yields additional insight into sources of manager alpha. Such a decomposition can assist investors in identifying and quantifying manager skill, provide insight into a managers investment approach, style, and biases, as well as aid in benchmark selection and creation