Jay's Asset Allocation Blog

Blog about my off-hours work on the problem of Asset Allocation including but not limited to Portfolio Optimization algorithms, algorithms and approaches for improved estimation of Asset Allocation inputs and other potentially related items.

Thursday, August 26, 2010

Custom Benchmarks

Went to an interesting talk at the Boston QWAFAFEW meeting by David Kane. It was based on this paper.
The basic thrust was that if you construct random benchmark portfolios with all aspects of the portfolio save for those where the manager claims skill the same, and those aspects where the manager claims skill are randomized across the universe you can see what the manager is really doing.
Of course this requires position level transparency to carry out as just described, but it seems like a powerful technique. If you are going to work with a portfolio where you don't have position level transparency, you could apply a factor model and potentially get similar results.