Benchmark
A standard of comparison used to evaluate a fund's performance against peer funds, public markets, or target return thresholds.
Benchmarks serve as the reference point against which manager skill is measured — separating market returns (beta) from manager-generated returns (alpha). Common benchmarks include public market indices (S&P 500, MSCI ACWI) for equity strategies, Cambridge Associates and Burgiss benchmarks for private equity, and absolute return hurdles (e.g., SOFR + 4%) for hedge funds.
For private market funds, the public market equivalent (PME) methodology compares fund returns against what a hypothetical investment in a public index over the same period would have returned — providing a more meaningful comparison than point-in-time index levels.
Frequently Asked Questions
What is a benchmark in investing?
A benchmark is a standard of comparison — such as the S&P 500 or MSCI ACWI — used to evaluate whether a fund manager is adding value through skill or simply capturing market returns.
How do benchmarks work for private equity?
Private equity funds use the public market equivalent (PME) methodology, which compares fund returns against a hypothetical public market investment over the same period, providing a more meaningful comparison than point-in-time index returns.
Why is benchmark selection important?
The wrong benchmark can make a mediocre manager look exceptional or an excellent manager look poor. The benchmark must reflect the actual opportunity set and risk profile of the strategy being evaluated.
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