Hug a Benchmark
- Thread starter Liming
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Hi Liming,
When I was consulting, I think it's fair to say the phrase had a somewhat negative (pejorative) connotation that referred to, for example, active managers who stylistically were benchmarked (and compensated) against an index like the S&P 500 and where they would tilt toward the *passive* end of the spectrum allocating their portfolio much like the index, weighting their portfolio to resemble the benchmark weights; e.g., they would "hug the index" for fear of underperforming too much. If you are benchmarked/compensated against the index, it may take courage to not hug the benchmark (e.g., to overweight the tech sector) because relative underperformance gives career risk (depending on the mandate and the client, it may be more desirable to lose -5% against -7% benchmark (relative outperformance) than to +5% against a +7% benchmark. Of course, this can be a deliberate style so it associates with the oppositive of absolute return strategies (which you might call, by definition, anti-hug strategies!). Enhanced indexing (it seems to me) is a by-definition "hug the benchmark;" i.e., allocate like the benchmark but over- or under-weight with limited tactical freedom. So, the way I experienced "hug the benchmark" was in response to career risk; career risk (in my humble opinion) is easily the most under-represented factor in all our financial/economic models.
In terms of FRM, I'd offer that "hugging the benchmark" ought to manifest as low tracking error
(also, when I sat for the CIPM, i discovered that much of the performance measurement theory is devoted to this area; i.e, parsing the desirable and skill-based "hug" from the rest)
David
When I was consulting, I think it's fair to say the phrase had a somewhat negative (pejorative) connotation that referred to, for example, active managers who stylistically were benchmarked (and compensated) against an index like the S&P 500 and where they would tilt toward the *passive* end of the spectrum allocating their portfolio much like the index, weighting their portfolio to resemble the benchmark weights; e.g., they would "hug the index" for fear of underperforming too much. If you are benchmarked/compensated against the index, it may take courage to not hug the benchmark (e.g., to overweight the tech sector) because relative underperformance gives career risk (depending on the mandate and the client, it may be more desirable to lose -5% against -7% benchmark (relative outperformance) than to +5% against a +7% benchmark. Of course, this can be a deliberate style so it associates with the oppositive of absolute return strategies (which you might call, by definition, anti-hug strategies!). Enhanced indexing (it seems to me) is a by-definition "hug the benchmark;" i.e., allocate like the benchmark but over- or under-weight with limited tactical freedom. So, the way I experienced "hug the benchmark" was in response to career risk; career risk (in my humble opinion) is easily the most under-represented factor in all our financial/economic models.
In terms of FRM, I'd offer that "hugging the benchmark" ought to manifest as low tracking error
(also, when I sat for the CIPM, i discovered that much of the performance measurement theory is devoted to this area; i.e, parsing the desirable and skill-based "hug" from the rest)
David
Out of curiosity, due to the relative scarceness of CIPM candidates, I'm curious to hear your thoughts of CIPM curriculum. The last post I found referring to this study was dated from 2009 and I was wondering if your thoughts have changed since then.
It seems like much of the curriculum overlaps with CFA with the focus on GIPS and Ethics as well as the CAIA curriculum with the focus on evaluating different benchmarks.
Much appreciated.
If only FRM tests run in July and January instead of May and November each year, I think they would get a larger enrollment pool due to conflict with other major professional designations.
It seems like much of the curriculum overlaps with CFA with the focus on GIPS and Ethics as well as the CAIA curriculum with the focus on evaluating different benchmarks.
Much appreciated.
If only FRM tests run in July and January instead of May and November each year, I think they would get a larger enrollment pool due to conflict with other major professional designations.
Hi ebb,
I surely don't have a complete picture on the status of CIPM, but personally, I am disappointed in (my perception of) its performance: I *think* there are less than 1,000 holders cumulatively, and it seems to remain very niche oriented. (I'm not overwhelmed by their promotion of it, either). Thanks, David
I surely don't have a complete picture on the status of CIPM, but personally, I am disappointed in (my perception of) its performance: I *think* there are less than 1,000 holders cumulatively, and it seems to remain very niche oriented. (I'm not overwhelmed by their promotion of it, either). Thanks, David
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