what does this phrase mean? factor-model-based benchmarks are not always intuitive to the fund sponsor or even the investment manager. thx!!
It means that since fund sponsor or the investment manager didn’t develope the factor-model-based benchmark themselves; so when they are looking at the benchmark, they don’t know the details of how the benchmark is developed/constructed.
Factor based benchmarks are developed by using past data and regression. So its not very intutive. The regression calculates a fund managers exposures to various factors basing on which a benchmark is constructed for the manager. Factor based models are like “returns based style analysis”.
thx!