I often get into discussions with clients and students about how benchmarks should be treated. For example, a few years ago I spoke with a hedge fund manager and suggested that he didn’t manage against any benchmarks; he quickly corrected me saying he did. But then I asked if he managed against them or compared his results against them, and he acknowledged it was the latter.
Many hedge funds pick several benchmarks to compare their performance with; for example, the DJIA, CPI, Barclay’s Gov’t Agg, S&P 500; but do they manage against any of these? No! Hedge fund managers are typically absolute managers who don’t manage against any benchmark.
But even when you do manage against a benchmark, it’s important that the benchmark align with your strategy. A growth manager, for example, shouldn’t manage against the S&P 500 as they would be missing the entire value half.
Benchmarks are a challenging topic, which we’ll explore further.