The practice of benchmarking is booming in the delegated portfolio management industry. As an asset allocation tool, benchmarking is a reference to be followed by the manager in a more or less strict manner. As a tool for measuring relative performance, benchmarking helps in assessing the manager’s skills as to market timing and/or security selection, and allows for meaningful definitions of tracking error and the information ratio. The closely related issues of principal-agent contracting, compensation schemes and implicit incentives, and optimal benchmarking are discussed at length. The evolution in the design of appropriate benchmarks is also analyzed.
LIOU, A. and PONCET, P. (2013). Benchmarking. In: Portfolio Theory and Management. 1st ed. Oxford University Press, pp. 490-510.