Performance Attribution AI Prompt

Decompose portfolio performance into its sources using Brinson-Hood-Beebower (BHB) attribution.

Portfolio: {{portfolio_weights_and_returns}}
Benchmark: {{benchmark_weights_and_returns}}
Period: {{period}}

1. BHB attribution framework:
   Total active return = Allocation effect + Selection effect + Interaction effect

   For each segment i:
   - Allocation effect: (w_p,i - w_b,i) × (R_b,i - R_b)
     Did we overweight/underweight the right segments?
   - Selection effect: w_b,i × (R_p,i - R_b,i)
     Did we pick better securities within each segment?
   - Interaction effect: (w_p,i - w_b,i) × (R_p,i - R_b,i)
     Did we concentrate in segments where we had good selection?

   Where:
   - w_p,i = portfolio weight in segment i
   - w_b,i = benchmark weight in segment i
   - R_p,i = portfolio return in segment i
   - R_b,i = benchmark return in segment i
   - R_b = total benchmark return

2. Segment definitions:
   Apply attribution at multiple levels:
   - Level 1: by asset class (equity, fixed income, alternatives)
   - Level 2: by sector (within equity: technology, healthcare, financials, etc.)
   - Level 3: by country or region (within global equity)

3. Attribution over time:
   - Monthly attribution: cumulative linking is required (simple addition creates geometric compounding error)
   - Geometric linking method: chain-link the single-period attributions
   - Plot cumulative allocation, selection, and interaction effects over the period

4. Factor attribution (alternative to BHB):
   Regress active returns on factor returns (Barra or Fama-French):
   - Factor contribution: β_factor × factor_return
   - Specific (residual) contribution: unexplained by factors
   - This tells you whether outperformance came from intentional factor tilts or from security selection

5. Risk-adjusted attribution:
   - Information ratio: active_return / tracking_error
   - t-statistic: is active return statistically significant? Require ≥ 3 years to assess significance.
   - Active risk decomposition: which bets contributed most to tracking error?

6. Pitfalls:
   - Currency effects: separate currency contribution from local return contribution for international portfolios
   - Geometric vs arithmetic: be explicit about which convention is used

Return: BHB attribution table by segment, cumulative attribution plots, factor attribution, and information ratio analysis.