Question 1

How do I choose the right benchmark for my fund?

Accepted Answer

The benchmark should reflect what your LPs would invest in if they didn't invest in your fund — the opportunity cost. For a US equity long/short fund, the S&P 500 is typical. For a sector-specific fund, a relevant sector ETF or index is more appropriate. For PE funds, the Cambridge Associates Private Equity Index or S&P 500 with a PME (Public Market Equivalent) adjustment is standard. The benchmark should be agreed upon with LPs upfront, not chosen retroactively.

Question 2

What does alpha look like on a chart?

Accepted Answer

Alpha is the gap between your fund line and the benchmark line on a cumulative return chart. When your fund line is above the benchmark, you're generating alpha — your fund has outperformed by that margin. When it's below, you're underperforming. Plotting both as indexed values (starting at 100) makes the gap immediately visual and quantifiable without requiring LPs to do mental arithmetic.

Question 3

How do I show performance across multiple time horizons?

Accepted Answer

Use a table alongside the chart showing 1-year, 3-year, 5-year, and since-inception returns for both the fund and benchmark. The chart shows the trajectory; the table provides precise annualized figures. For LP reports, 'since inception' is typically the most important period. Avoid cherry-picking time periods that show your fund favorably — sophisticated LPs will notice.

Question 4

How should I present a period of underperformance to LPs?

Accepted Answer

Acknowledge it directly rather than obscuring it with chart manipulation. Explain what drove the underperformance — market conditions, specific positions, sector exposure — and what you've done or are doing in response. LPs are more concerned about self-awareness and process than any single bad quarter. A well-explained period of underperformance builds more trust than a chart that appears to minimize it.

Question 5

What are common benchmarks for different fund types?

Accepted Answer

Equity long/short: S&P 500, Russell 2000 (small-cap). Fixed income: Bloomberg US Aggregate Bond Index. Real estate: NCREIF Property Index, MSCI US REIT Index. Private equity: Cambridge Associates PE Index, S&P 500 PME. Venture capital: Cambridge Associates VC Index. Hedge funds: HFRI Fund Weighted Composite Index. Always use the benchmark most relevant to your strategy and investable universe.

Fund Performance vs Benchmark

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FAQ: Fund Performance vs Benchmark