Benchmarking Alternative Investment Strategies

Timothy Peterson

The issue of calculating and comparing benchmark returns, particularly for private equity, is a highly contentious issue. The only consensus seems to be that there is no ideal solution. Some fault mathematics, others methodology or valuation practices.

While the title of the chapter references alternative investment strategies, the term is too broad when it comes to discussing benchmarks. This chapter recognises that there are multiple asset classes therein and the benchmarking approaches and challenges will be different for each. Accordingly, it is not appropriate to definitively claim that one approach is better than another. Instead, we present some of the common practices, trends and caveats with each.

CHALLENGES OF BENCHMARKING ALTERNATIVE INVESTMENT STRATEGIES

Much literature already exists asserting and confirming that traditional peer groups and indexes are poor benchmarks for traditional performance evaluation. For market-based strategies such as hedge funds, traditional performance evaluation approaches are problematic. For real, private assets, traditional performance evaluation approaches fail outright.

The challenges associated with properly benchmarking an