Benchmark

Allocator relevance: Benchmarks anchor performance evaluation, manager selection, and mandate fit—especially across vintages and strategy types.

Expanded Definition

Benchmarks provide context for whether performance reflects skill, risk-taking, market exposure, or simply favorable timing. In public markets, benchmarks are often clear indices. In private markets, benchmarking is more complex due to appraisal-based valuation, irregular cash flows, and wide dispersion across managers and vintages.

A high-quality benchmark aligns with the strategy’s risk profile, liquidity, and return drivers. Poor benchmark selection can create false confidence or unfair comparisons.

How It Works in Practice

Allocators compare net and gross performance against relevant indices, peer quartiles, and strategy-specific references (e.g., private equity vs venture vs private credit). They often supplement benchmarks with attribution logic and scenario analysis to understand performance drivers.

Decision Authority and Governance

Benchmarks are typically set through an Investment Policy Statement (IPS) and IC processes. Governance matters because benchmark changes can mask underperformance or shift accountability.

Common Misconceptions

• One benchmark fits all strategies.
• Benchmark outperformance automatically implies alpha.
• Private market benchmarks are directly comparable to public indices.

Key Takeaways

• Benchmark selection should match strategy risk and liquidity.
• Private market benchmarking requires vintage and peer context.
• Governance must prevent benchmark “moving targets.”