Monday, August 31, 2009

"What's the best attribution system?"

A client who is considering a switch in attribution vendors asked me what the best system is. Well, that all depends, doesn't it? Attribution software is a bit unique because it requires the firm to give a lot of thought as to how they wish to derive attribution:
  • what model do you want to employ?
  • geometric or arithmetic?
  • holdings- or transaction-based?
  • do you want the interaction effect to be shown, ignored, combined with another effect?
  • how would you want "off benchmark bets" to be handled?
  • do you want attribution shown at the security level?
  • daily or monthly?
  • what attribution linking method do you prefer?
  • and more!
While some of these points may be handled across all vendors (e.g., virtually all equity attribution vendors support the Brinson-Fachler model, though not all support Brinson-Hood-Beebower), there are others which will vary by vendor (especially when it comes to fixed income attribution).

The firm should decide how they want to handle each of these before starting off on their search. If they don't care, well that's fine, too. But I suspect that most firms, when they understand the differences, will make a choice.

Software searches are always loads of fun, kind of like looking for a new car. And just as with a car purchase, we wouldn't ask someone "what's the best car?," as we first need to decide what kind of car we want (SUV, coupe, van, sports car) as well as how much we want to spend. And while we wouldn't necessarily expect a new car purchaser to solicit the help of a consultant (though a spouse or friend may assist), software searches often involve the use of consultants because of the amount of time needed and the thoroughness required for a successful search.

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