What is a custom security-based benchmark primarily designed to do?

A custom security-based benchmark is primarily designed to accurately reflect the investment discipline of a specific investment manager. This means that it is tailored to align with the investment strategies, styles, and objectives of that particular manager or fund.

Such benchmarks are crucial for evaluating the performance of an investment manager because they provide a relevant point of comparison that considers the specific risks, asset classes, and securities that the manager typically utilizes. By having a customized benchmark, it becomes easier to assess whether the manager has outperformed or underperformed relative to their unique investment strategy, rather than a generic market index that may not reflect their specific focus.

In contrast, identifying high-risk investments, measuring overall market performance, and evaluating past investment strategies do not capture the specific purpose of a benchmark designed around the unique characteristics of an investment manager’s approach. Those functions can be significant in their own rights but do not directly address the primary aim of a custom security-based benchmark.