Performance attribution with respect to interest rates, FX, carry, and residual market risks

TL;DR

This paper introduces a method to decompose portfolio PnL into FX, interest rate, carry, and residual market risk components, aiding performance analysis of complex asset positions.

Contribution

The paper presents a novel decomposition technique for portfolio PnL, specifically accounting for residual market risks, demonstrated on real fund data.

Findings

Effective decomposition of FX and interest rate impacts.

Application to real fund performance data.

Insights into residual market risk contributions.

Abstract

We develop a method to decompose the PnL of a portfolio of assets into four parts: (a) PnL due to FX rate changes, (b) PnL due to interest rate changes, (c) carry gain due to time passing, (d) PnL due to residual market risk changes (credit risk, liquidity risk, volatility risk etc.). We demonstrate the usefulness of our approach by decomposing the performance of an FX- and interest rate-hedged negative basis position in our fund XAIA Credit Basis II, and we apply the methodology to decompose the performance of our fund XAIA Credit Debt Capital in the first quarter of 2022 into PnL contributions of the single positions.