Benchmark

Definition

A benchmark is a performance reference point used to assess whether an investment strategy is delivering expected returns for the risks taken. Benchmarks can be market indices, custom blends, peer group medians, or absolute return targets. The key requirement is appropriateness: a benchmark should reflect the strategy’s exposures, constraints, and time horizon. Allocator Context Allocators use benchmarks to evaluate performance consistency, downside behavior, and whether returns are driven by market beta or genuine skill. For public strategies, index benchmarks are common. For private markets, allocators may rely on peer sets, vintage comparisons, and internal hurdle targets due to valuation lag and illiquidity. Decision Authority Benchmark selection is often embedded in IPS documents, manager guidelines, and reporting expectations. Committees use benchmark-relative outcomes to determine re-ups, manager retention, and allocation increases. Misaligned benchmarks create confusion and can damage credibility. Why It Matters for Fundraising Managers should choose benchmarks that are defensible and consistent, then explain why they fit. If the benchmark is too easy, allocators discount results; if it’s mismatched, allocators view it as evasion. Fundraising improves when managers can clearly separate beta from alpha and show how performance behaves relative to benchmark in stress periods. Key Takeaways Benchmarks must match exposure and constraints Committees evaluate outcomes relative to benchmarks Mismatched benchmarks reduce credibility Clear beta vs alpha explanation increases trust