Setting the Benchmark: Spotlight on Private Equity
Gitanjali M. Swamy, Irina Zeltsera, Hossein Kazemi, and Edward Szado

This article discusses the properties of ideal benchmarks and provides a framework for creating ideal benchmarks with an emphasis on private equity benchmarking. In reality, all benchmarks involve some deviations away from this ideal. It is important for the end user to determine which of the characteristics are of primary importance and choose a benchmark accordingly. In addition, it is of vital importance that benchmarks are not viewed in isolation. This is particularly true of benchmarks with limited transparency. Typically, multiple benchmarks are available to track a particular asset class or investment style. A comparison of the available benchmarks can provide some insight into the impact of benchmark choice for the investment in consideration. The comparison may also indicate the existence of critical limitations (or advantages) of a particular benchmark as a valid comparison for the investment in question. If the indices under consideration exhibit different return patterns or factor exposures further investigation may be warranted. The differences may not be due to faults in the indices, but rather due to a particular focus or exposure. Understanding these differences can provide further insight into the appropriateness of each index for the purpose at hand.

All About Parity
Hossein Kazemi

The risk parity approach to asset allocation has enjoyed a revival during the last few years because such a portfolio would have outperformed the "normal" portfolios with their typical significant allocations to equities. This article discusses the risk parity approach to asset allocation and examines its underlying assumptions. The central idea of the risk parity approach is that in a well-diversified portfolio all asset classes should have the same marginal contribution to the total risk of the portfolio. Under the risk parity approach, there is generally a significant allocation to low risk asset classes and allocations to equities and other risky assets are typically below what allocation models employed by the industry. While risk parity is a viable approach to asset allocation, it does not represent a trading strategy that can be employed by active managers. The reasons are that it does not require any estimate of expected return on an asset class (potentially a source of skill for active managers) and it always leads to positive weights for asset classes (long/short strategies cannot be implemented). It is a suitable model for institutional and high net worth investors who do not face significant constraints on their asset allocation policies and are able to use leverage.

20 years of VIX: Implications for Alternative Investments
Mikhail Munenzon

This article investigates the statistical properties and relationships of VIX with alternative investment strategies. The author finds that different VIX quintiles result in very different risk adjusted performance for all strategies and confirm that significant deviations from normality are observed in the quintiles and the full sample, which are not fully captured by traditional risk metrics. The author demonstrate that correlations among strategies are unstable and non-linear, leading to highly concentrated diversification benefits at the times of market stress, which a broad set of exposures is likely to negate. The analysis also demonstrates that at certain quintiles, correlations are high between traditional and alternative investment strategies and performance characteristics are quite similar. The article establishes that the superior, long term performance of such strategies relative to traditional asset classes is not due to higher returns in good times, but rather better preservation of capital in bad times.

The Risk Reducing and Income Enhancing Buy-Write Strategy
Philip H. Gocke

This article provides a summary of Kapadia and Szado [2011] which examines the performance of buy-write strategies on the Russell 2000 over the 15-year period of February 1996 to March 2011. Overall, the results suggest that the buy-write strategy can outperform the Russell 2000 index under standard performance measures. This risk adjusted outperformance even holds during the unfavorable (relative to a long index position) market conditions of March 2003 to October 2007, where the Russell 2000 was steadily trending upwards. Although the main driver of the return is the underlying index, both transaction costs and the option volatility risk premium (defined as the implied volatility less the realized volatility) are critical to the performance of the strategy. It is clearly evident that the method of execution of the strategy as well as the choice of the options has a large impact on the performance of the strategy. In this light, Szado and Kapadia provided a somewhat conservative analysis of the buy-write strategy's performance, in the sense that the implementation does not allow for an active selection of the moneyness or time to expiration of the calls.