Benchmarking Defensive Equity Strategies

This technical report discusses the benchmarking considerations for the Parametric Defensive Equity (DE) Strategy, which is categorized as an options-selling or volatility risk premium strategy. It outlines the main asset allocation buckets where investors typically position DE, including large-cap equity, alternative assets, and a specific carve-out for options-based strategies. The report details the three broad categories of benchmarks relevant to DE: broad-market indexes, manager universes, and alternative indexes, each with its advantages and drawbacks. The report emphasizes the importance of constructing a proper benchmark to isolate the true value-add from the manager's active decisions, especially for nontraditional strategies like DE. It also highlights the versatility of DE in portfolio positioning and the potential benefits of using a blended approach to benchmarking to address specific strategy components. The report concludes with expectations for the continued development of benchmark indexes by Cboe to enhance performance evaluation.