Eric Stanhope Hirschberg, Orion Investment Management, Bermuda

While it’s tempting to say ‘absolutely nothing’, benchmarks have a meaningful role in the allocation process.
How relevant a benchmark is to the investor really comes down to the context in which the benchmark is derived.
 

My personal preference is to view a benchmark as a tool to understand the alternative to an allocation. In this
way the ’usefulness’ of a choice can be measured against the alternative of not choosing or, for that matter,
making an alternative choice. This is a local perspective, in so much as your choices and risk tolerance are
not uniform to an entire investment population. For that, I need to accept the nearest correlating passive and
investable asset as the benchmark. And while this approach is fine for a strategy that maintains a significant
correlation to a passive investable benchmark, how should I view the myriad strategies in which the manager
or asset allocator tells us his expertise is to opportunistically invest?
 

Consider the manager who is actively making choices to allocate or re-allocate between a number of
possible strategies or benchmarks, based on some criterion which he holds as his proprietary domain. Below,
I demonstrate a methodology that allows you to break down a manager’s or asset allocator’s strategy into
a series of choice components, with a corresponding framework for valuing the various choices made over
the investment horizon.
 

Measurement as a function of rational choice