First Remember : properties of a valid benchmark are : Unambiguous, appropriate, investable, owned, reflective of current investment opinion, specified in advance, measurable . TYPES: Absolute - are not investable. Managers universes: not Measurable ( Remember M for M) Broad Market Indexes:they are investable, measurable , and may be specified in advance. May be acceptable as a benchmark if manager selects securities similar to the benchmark. However, sometimes the manager’s style may deviate from the style reflected in the market index. Style Indexes- some style indexes may weight securities and economic sectors much larger than what managers may consider prudent. Factor Model Based- good because they capture systematic source of return. However, managers rarely think in terms of factor of exposure. Also, They are ambiguous: can build many benchmarks with same factor exposure and each one will have a different return. Returns- Based. Good when only available information is returns. Disadvantages ( like style indexes), may weight securities and economic sectors much larger than what managers may consider prudent. ANd require many months of observation. Custom Security Based: meets all of the benchmark validity criteria. BUT expensive to construct and maintain + not composed of published indexes - lack of transparency.
Remember SAMURAI S pecificed in advance A pproriate M easurable U nambiguous R eflective of current investment opinion A ccountable I nvestible