One area that often results in a lot of confusion (and probably some controversy) is how one should calculate performance attribution of a portfolio that includes derivatives. I have been of the opinion that if the portfolio holds anything that isn’t represented in the benchmark (I’m not speaking of specific securities, but from a broader, asset class or sector perspective), it deserves special attention.
I am currently designing an attribution model for a client that invests in options, alongside their equities. I must confess that putting this together with their data is taking a bit longer than I had planned, but I am hopeful we will present them with a valuable tool they can use with their clients and prospects.
The general approach is to segregate the options from the equities. And since these are covered writes, the covering securities or cash will be with the options.
The result will be a clean portrayal of where the return comes from.
More details will follow, most likely in The Spaulding Group’s monthly newsletter. So stay tuned!