Do You Really Know Your P&L? The Importance of Impact-Adjusting the P&L

In this article, we examine the practice of evaluating trading and portfolio performance using accounting P&L, which values positions based on current market prices. We demonstrate that this method is biased due to the price impact from trading, and can give the impression of profits when there is none, even after accounting for closing costs. Instead, we propose using fundamental P&L, which adjusts market values for price impact, as a more accurate representation of investment performance. We provide both theoretical and practical evidence to support this claim and show that the difference between accounting and fundamental P&L, known as the trading footprint, can be significant in common trading scenarios. We close the article with a number of practical implications and recommendations for market practitioners, regulators, and senior management when evaluating investment performance