Ex-Ante Performance Attribution Analysis
Ex-ante performance attribution analysis, also known as risk-based performance attribution analysis, uses a portfolio’s factor exposures to determine expected returns. This is in contrast to ex-post analysis, which is based on the correlation of actual performance to factor returns.
As a very simple example of ex-ante analysis, if we wanted to determine how much of a portfolio’s P&L could be attributed to a market factor, we would start by determining the portfolio’s market exposure. If the firm’s beta to the market at the start of the day was $100 and the market return for the day was 2%, then we would expect the portfolio to make $2 = $100 x 2%. This $2 is attributed to the market factor. If instead of $2, the fund made $3, then the difference, $1, would be attributed to alpha. In other words, we have split the total P&L of $3, into $2 from the market factor and $1 from alpha. To determine the performance attribution over longer horizons this process would be repeated daily.
Ex-ante performance analysis, because it requires us to calculate factor exposures (see factor analysis), is more difficult to calculate. That said, for portfolios with complex or changing risk profiles, ex-ante performance analysis will often provide a more accurate picture of the drivers of performance. Ex-ante performance analysis also has the advantage that it can be run for horizons as short as one day. For hedge funds, ex-ante performance analysis is often the preferred method of performance attribution.