Note that the title of this post includes “market index,” not “benchmark.” The reason? Benchmark can mean more than market indexes; for example, it includes absolute benchmarks, such as LIBOR or LIBOR + 1. These ARE appropriate for hedge funds, since hedge funds are typically absolute managers, that DO NOT MANAGE against any particular market index.
I had a conversation a few years back with legendary investor Barton Biggs about the use of indexes with hedge funds. He said that they include them in their reporting, and I asked, “but do you manage against them?” He acknnowledged that they did not.
And so, market indexes typically only serve as references when it comes to hedge funds. That’s why we often see a mix of indexes, which might include the Barclay’s Agg, the S&P 500, and the DJIA.
Does a hedge fund need a market index? Yes, I’d say they should have them, but their role is different than what we typically find in long only space. Hope this makes sense. Please comment below with your thoughts.