Abnormal Returns
Carl Bacon, CIPM, StatPro plc.
Ian Thompson, Ph.D. StatPro plc. and
Pierre van der Westhuizen, StatPro plc.

In calculating Time-Weighted Returns (TWRs), performance analysts must consider the specification of the timing of cash flows/transactions used in the calculations. For certain cash flow timings and data conditions calculation, it may not be possible to calculate a return, or an “Abnormal Return” is generated. Abnormal Returns are defined here as a return that appears to misrepresent the true economic performance of the asset being measured. Considerable time and effort may need to be expended in providing adjustments, workarounds and/or an explanation to the recipients of performance results, adding to the performance data management overhead within investment management firms. In some cases, the workarounds may cause inaccuracies in the attribution analysis downstream. The authors describe an approach which enables meaningful returns to be calculated, while maintaining consistency and accuracy for further analysis.