Abstract
As the investment management industry becomes more sophisticated, investment managers have come to use benchmark indexes in an increasingly complex fashion: as a baseline along which the manager intends to add value and manage risk; for determining which factor bets have most influenced overall portfolio returns (attribution analysis); and for determining the extent to which the manager adds value (through use of the information ratio, for instance). Managers typically use readily available published indexes for these purposes, although these indexes often do not accurately reflect the manager's true investment universe, and thus give rise to distortions and consequently poor information. “Strategy benchmarks” are often beneficial alternatives from the perspectives of client, consultant, and investment manager.
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