Thursday, June 3, 2010

In the middle of the day...

I'm completing a report for a client who asked me to review their performance measurement system and processing. They offer their clients the option of treating flows as middle-of-day events. I strongly oppose this method.

First, there's a reduction in accuracy: we value portfolios at the start and end of day, but not at the middle. Thus, we're not having an exact method (which we'd have with start- or end-of-day treatment) but an approximate method.

Second, I believe the reason firms choose this is simply because they can't decide whether to use start- or end-of-day.

The answer, I truly believe, is:
  • Inflows: treat as start-of-day events
  • Outflows: treat as end-of-day events
and don't bother with midday.


  1. I would tend to agree that external cash flows should be treated as either start or end of the day.

    With respect to internal cash flows, income payments should either be start of the day or end of day as well. Trades, however, arguably occur during the day, so perhaps middle of the day treatment makes sense for some internal cash flows.

  2. John, interesting point about trades. Since I favor IRR for internal cash flows, we'd be doing them not on a daily basis but across a longer time period, so I would still think midday doesn't work. If you're going to do TWRR, then perhaps you're right.

  3. David,

    For accuracy purposes, I strongly support you that external cash flows must either be treated beginning of the day or end of the day. Even GIPS(R) does not support mid day treatment of external cash flows. I am wondering how would the client claim the compliance with GIPS(R).

  4. Rishi, I'm not sure it's fair to say that mid-day isn't supported. If you mean from a monthly return perspective, where we're speaking of the middle of the month, you're right, but if we're speaking about a day, this isn't so obvious. Yes, the standards speak of "weighting" the cash flow, but in the context of "day-weighting," not "hour-weighting" or "intra-day" weighting. It's more "inter-day weighting," as in across the full period.

    My guess is that if we pushed it we'd find that midday weighting IS acceptable and probably should be, though I happen not to favor it (others are fine with it, and in the grand scheme of things, it's probably okay to allow).

  5. Agreed, regarding internal cash flows and IRR.


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