Author: James Zhang
Just a few weeks ago, more than a thousand teams commenced trading in the 2022 Bloomberg Global Trading Challenge. The goal of the challenge is to outperform the Bloomberg World Large, Medium & Small-cap index (WLS index) and teams are ranked based on their Relative P&L. After looking at the leaderboard and noticing that some of the top-ranked teams have a negative P&L, it left many teams at Bayes Business School confused about the rules of the challenge. In this article, we will explain the difference between Relative P&L and P&L, how these values are calculated, and how this relates to beating the index. Below, is the leaderboard after the first week of trading.
So, what is an index? Essentially, it is a basket of stocks used to track a market’s performance and can be used as a benchmark for your trades. In other words, your trades don’t just have to make money; they have to make more money than the benchmark index to justify the need for an actively managed fund rather than investing in an index fund. The WLS index is comprised of 10,769 stocks covering 99% market cap of the measured market. You can think of it as a portfolio consisting of 99% of the world's publicly traded companies.
The figures below show us some of the stocks on the WLS index. We can see that Microsoft has a weighting of 2.918690% of this portfolio whilst Aarti Pharmalabs only weighs 0.000026%. This means, if Microsoft was to increase by 10% and all other stocks were to remain at the same price, the WLS index would only increase by 0.291869%. This weighting rule also applies to stocks that decrease in value. For example, if Aarti Pharmalabs was to decrease by 20% whilst all other stocks were to remain at the same price, the WLS index would only fall by 0.0000052%.
Evaluating our trades
Looking at the portfolio below, we see that Microsoft has a P&L of $4,232 but Rel P&L of -$1,713. What does this mean? The Rel P&L is telling us that during the lifetime of our trade, Microsoft as a stock, has performed worse than the WLS index. Despite making money, we would have made more money if the capital was to be invested in the WLS index.
How is the relative Profit and Loss Calculated?
First, we need to calculate Profit and Loss:
Profit and Loss (P&L) is calculated for the selected period, such as Quarter to Date (QTD) or Year to Date (YTD). It is calculated as the sum of all cash flows throughout the period. Exposure at the beginning and end of the period are treated as cash flows. For example, a long idea with exposure of 1M at the beginning of the evaluation period has an initial negative cash flow of 1M. [1]
P&L = [SUM (Cash Flow) – Initial Net Exposure + Final Net Exposure]
Now, we can calculate Relative Profit and Loss:
At the idea level, Relative Profit and Loss (Rel P&L) is the P&L generated by the idea above and beyond the P&L of its relative index during the lifetime of the idea, calculated by applying the cash flows from the idea to the relative index, using intraday pricing (where available). At the group level, relative P&L is the sum of all the relative P&L of all ideas in the grouping[2]. It is calculated as:
REL P&L = [SUM (Segment P&L) + Exposure Change since yesterday’s close]
Where:
1. Each segment P&L is the period between actions (e.g., Open, Update, Close) and is defined as [ (Initial Intraday Rtn * Dividend Adjusted Rtn * Final Intraday Rtn) * Cash in at Segment Start].
2. Returns (Rtn) are percentage changes as factors.
3. Cash In at Segment Start is the exposure of the idea’s security at the end of the previous segment or Cash In for the initial segment.
Rel P&L is related to the lifetime of your trade. We can see this from the figure below. In this portfolio, Credit Suisse (CSGN SW) the CSGN SW on the bottom which we will denote as CSGN SW1 was composed one day before the CSGN SW on the top which we will denote as CSGN SW2. Due to the performance during that one day, the REL P&L of CSGN SW1 is negative whilst the REL P&L of CSGN SW2 is positive. Meaning, it is important to correctly time the execution of trades.
[1] As defined in the Help Page of the TMSG<GO> function of your Bloomberg Terminal [2] As defined in the Help Page of the TMSG<GO> function of your Bloomberg Terminal