I conducted a GIPS(R) (Global Investment Performance Standards) verification for a firm who occasionally uses benchmarks solely for "reference" purposes; this is quite common with hedge funds, that are "absolute" strategies, where no appropriate benchmark exists. And so, an index like the S&P 500 might be used.
If we look at the definition of "benchmark" in the Standards' glossary we find:
Within the corpus of the Standards we find:
THIS, to me, is a much better definition. Hopefully, in the 2020 or 2025 version, we'll see an expansion of it in the glossary.And so, if the benchmark is solely for reference purposes, although it fulfills the definition, it fails to meet the requirements of this provision (i.e., I.5.A.1.e.), and the firm must include a disclosure, as required by:
Simple, right?
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Let's consider that the "absolute return" strategies of certain hedge funds are to produce positive returns across all market cycles. For example, an "objective" of a hedge might be to produce a return of 5% over inflation, so that a client can make withdrawals regardless of up or down markets. In such a case, CPI + 5% would be the appropriate performance benchmark, because the goal or "objective" of the investment portfolio is to produce a 5% real return, rather than producing a return that meets or exceeds a specific asset index. In this case, the benchmark and the objective would simply be a number that's derived by a measure of inflation plus a target performance spread. So, it's not that a benchmark does not exist; it does. It's just not an asset benchmark.
ReplyDeleteGreat point; yes, an absolute benchmark can be used, and often is. However, it can't be managed TO, nor can attribution be run AGAINST it, thus it isn't quite as effective as a market index. But yes, benchmarks for absolute managers can be employed; thanks!
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