How to select/construct benchmarks for black-box trading strategies?

Question

When faced with a black box trading strategy with extensive historical data available, how would one select/construct a representative benchmark?

As a trivial example, when a strategy historically consists only of long trades on tech stock, the Nasdaq Composite index might be a suitable benchmark.

What about benchmarks for strategies that do not exhibit such clear tendencies in the types of trades they perform?

I can imagine constructing a composite benchmark would be appropriate. Which guidelines/ frameworks/methodologies are applicable?

Answer 1

Clearly, it's much more difficult than for a white-box strategy.

But you still have some information:

• What is the return profile?
• What is the average holding period?
• Does it go long/short?
• What assets are traded?

Now you can choose a benchmark of an index that matches these criteria as closely as possible. If an appropriate benchmark doesn't exist, then you can create one: produce a very simple model that characterizes the return profile and run it as your own index (just for benchmarking purposes).