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The process for defining custom benchmark structures and generating the performance data, returns, and weights is generally the same across all types of custom benchmarks. The custom structures that you can define and the source data required to build the custom benchmark data can differ depending on the custom benchmark type. The sections that follow provide detailed definitions and methodologies of the types of custom benchmarks and the data required to build each of them.
A description of common terms used with custom benchmarks and a list of the types of custom benchmarks available using Eagle Performance follows.

Terminology

When using custom benchmarks, terminology is important to ensure clarity. The following table defines basic terms.

Term

Definition

Custom Benchmark

The user-defined benchmark which is created by the Custom Index Builder process.

Source Data

Performance data that exists in the PERFORM database prior to the creation of the new custom benchmark.

Source Dictionary

The performance model associated with the source data.

Target Dictionary

The performance model associated with the target entity (the new custom benchmark) that you are creating.

Segment

A segment is the same as a node.

Level

A consistent point in the structure across all branches. For example, Level 2 could be Equity, Bond & Cash.

Node

Any single node of a dictionary including total. For example, Equity, UK, Total, or Chemicals.

Constituent

A security.

Vendor supplied index

The same as the Source Data.

Custom Index Attributes Definition (Definition)

Specifics held in the database table RULES..CUSTOM_INDEX_ATTRIBUTES that define the custom benchmark entity. These specifics include source entities, weights, sources, and assignment levels, among others.

Underlying Source Entities

The entities that comprise the custom benchmark.

Types of Custom Benchmarks

Several types of custom benchmarks are used to calculate returns, as described in the following table.

Custom Benchmark Type

Description

Blended benchmark

The custom benchmark return is equal to the weighted sum of the vendor index (source index) returns. To calculate this benchmark, you need to load the initial weights and any periodic changes to the weights.
For example, 50% LEHMAN + 50% SP500.

Floating (Floating weight blended benchmark)

The custom benchmark (target benchmark) return equals the weighted sum of the vendor index (source index) returns, but the weights are calculated by PACE, in between reset dates, using weights that reflect the relative change in source index levels over the period. You can define either:

  • Static Weight. Enter initial weights for the custom benchmark.
  • Active Weight. Identify a reference entity to use as the source of weights for the custom benchmark.
    For example, 50% LEHMAN + 50% SP500, where the weights are reset to 50% at each quarter-end and allowed to float with the market in between quarters.

Linked benchmark

Where the returns from more than one source index are used to form the time series of index returns. For example, SP500 for period A linked to R2000 for period B.
Also allows you to define a Hurdle Based benchmark, where the return is a specified number of basis points (bps) relative to a source benchmark. For example, 100 bps over SP500 for period A linked to 125 bps over SP500 for period B. For Hurdle Based benchmarks, you can either:

  • Apply a constant offset to each period in the year.
  • Apply a variable offset to each period within the year, such that linked results for the year have the specified annual basis point offset.

Exclusion benchmark

Enables you to exclude segments or constituents from a vendor-supplied index.

Constrained benchmark

Enables you to constrain, or limit, the weight of a security or segment level of a vendor-supplied index and:

  • Proportionately reweight the remaining securities and segments
  • Recalculate the returns above the constrained level using the new constraint-weighted returns
  • Reweight the securities and segments below the constrained level using the new constrained weights

Currency Conversion benchmark

Enables you to convert the vendor-supplied index returns from their base currency to another base currency that you specify.

Hedged benchmark

Calculates index returns based on the assumption that the currency component of the source index return was hedged at the beginning of the period. The hedged returns are calculated with reference to the local return of the securities and segments of the source index and the base currency of the source.

Carve out benchmark

A carve out is a subset of a portfolio's assets including a cash portion. Suppose you had a balanced portfolio. An example of a carve out is a balanced portfolio (which contains equity and fixed income securities) excluding the fixed income portion.
The carve out functionality allows you to build a portfolio that combines a cash return and a carved out node's return from a particular portfolio. You can select the cash node from a different source entity than the one used to select the carved out node.
You can create a carve out using a Blended or Floating type custom benchmark.

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