Benchmarks for Multi Asset Portfolios?

The real money benchmarks are normally the common big indices, e.g. Spooz for equities, Barclays (used to be Lehman) Agg for bonds, etc.

HFs don't really use benchmarks per se and are more absolute return. However, I suppose the more appropriate term to use is sorta kinda "hurdle rates". The most common ones are (or at least used to be) based on LIBOR.

My Z$2c...

Mutual funds use different benchmarks based on the type of strategy, so e.g.

Large-cap US equities mutual fund ---> S&P500 Large-cap US growth equities fund ---> russell 1000 growth Global long-only fund ---> MSCI world Global tech fund ---> MSCI global tech

HFs are usually judged on absolute performance, but some allocators look at the Barclays Hedge Fund index as a benchmark, which I believe is just a collection of various HFs' performance numbers. I don't think that benchmark can be updated on a daily basis and maybe more of a monthly performance number, but someone in the HF industry would know better.

There's a whole lot of reading in CFA Lvl III on this you could have a look at.

The theory is that you want to make sure the benchmark reflects the style of the investor as well as the asset class as such. So you can get quite fancy with custom-built benchmarks, with weights the result of regressions and so on.

Maybe it's as much art as science, but the risk is always that if you're a small cap biotech firm focusing on East Asia, and you use the MSCI Global, then your alpha against that index would actually not reflect manager skill at all, but simply a different set of factor exposures. You'd get paid for the kind of manager you are rather than for being particularly good at what you do.

Sometimes you can get lucky and find an index that's appropriate, but a lot of the time it is probably better to generate a custom benchmark.

And yeah, hedge funds are more about absolute returns and are at any rate so heterogeneous and liable to changing factor exposures frequently that it'd be hard to set an appropriate benchmark you can compare them to over time. CFAI at least is wary of HF indices as well, because there are issues with biases induced by who enters and exits the index over time.

Antipodean

There's a whole lot of reading in CFA Lvl III on this you could have a look at. >

Thanks for this. Also I believe an issue with the HF indices is that only those funds who choose to report are included, so needless to say it will be one sided.

With asset allocation, it's hard because you have mixtures of exposures, active/passive, perhaps some illiquids. In my experience, at that point bmarking becomes a challenge because the only true benchmark is the client's goal itself.

All that being said, IME, a positive alpha and high sharpe are validation of a sound strategy. But again, what use is that to a client who has an income threshold that needs to be met? Or willingness to take on liquidity risk in private placements, etc?

Why not do a weighted average for each asset category?

If you're portfolio is 50% equities, 20% fixed income, 20% alternatives and 10% commodities, you just do 50% x equity index + 20% x fixed income index + 20% alternative investments index + 10% x commodity index

At a H-Fund start-up? I really don't understand the context you are placing these roles within. You need to elaborate and be more clear.