Returns-based style analysis

Abstract

Returns-based style analysis (RBSA) aims to support those who cannot be considered insiders of an asset management company in identifying the asset allocation of a fund and understanding how the assets under its management are divided among different investment categories. Sharpe’s RBSA offers a deductive method with which to analyse investment styles. RBSA is a statistical methodology that uses exclusively the past returns of a fund and of the asset class benchmarks to identify the combination of long positions in these indices that would have replicated (more closely than other combinations) the effective performance of the fund over a specified time period. Essentially, RBSA makes it possible to assess the asset allocation of the fund without any direct knowledge of the portfolio holdings, since this is implicit in the tangible elements available, i.e. the fund’s performance as resulting from the audited values of its units or shares and the performance of verifiable and widely-used benchmarks. The present chapter will seek to provide an in-depth examination of the methodological profiles of RBSA, as well as a few practical examples of its application.