Misfit return/risk

[hei.so]

What is the definition of these?
I know that the portfolio manager is comparing his portfolio’s return to a market index (S&P500) and a style index (for example, small-cap). If misfit return is the return on the style index minus the market index, does this mean that it is luck? In other words, the manager has nothing to do with this return (ie. no skill in stock picking involved).

 

[ov25]

misfit return bridges between investor who generally views the portfolio from the market index perspective (normal benchmark) and manager who claims style to be his skill (style benchmark).
So what investor considers total risk has 2 components - misfit (manager considers not accountable to this return/risk 2) true active (manager has signed up for this return/risk)
the managers skill is involved by beating his style (stock picking)
hth

 

[hei.so]

^ Okay so it is what I thought. A manager’s skill is based on beating his “style” instead of the normal benchmark.

 

[sunseeker]

Rportfolio - Normal Benchmark = TRUE ACTIVE RETURN
Normal Benchmark - Investor Benchmark = MISFIT RETURN
Key message is that if we eliminate misfit risk we also eliminate the chance to gain alpha like Completeness fund where misfit risk is 0 …i.e. it tracks benchmark = NO ALPHA.

 

[daharmattan1]

For whatever it’s worth and on the same line as sunseeker it can be helpful to relate this idea to the concept of core-satellite portfolios as well.