Understanding the appropriate benchmark timing is a critical component in managing risk for institutional investors, especially when portfolio exposures are altered. If an exposure shift is not properly aligned, the portfolio may be exposed to significant unwanted risks due to deviations from benchmark. To minimize such deviations, we discuss three scenarios and demonstrate practical ways that “exposure benchmarking” can reduce portfolio risk.
- Portfolio inflows and outflows
- Changes in manager allocations
- Asset allocation shifts
In each of these cases, substantial risks can be reduced by aligning the exposure shift with the benchmark timing.