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Mirror, Mirror on the Wall, which is the Fairest Benchmark of them All?

Manager versus factor-based benchmark selection

Nicolas Rabener
10 min read
5 Sep 2022

SUMMARY

  • Evaluating manager performance is difficult as it requires an appropriate benchmark
  • The manager’s benchmark selection is often not objective given conflicts of interests
  • Factor exposure analysis can be used to systematically identify the best benchmark

INTRODUCTION

Although information asymmetries have largely disappeared in capital markets, there are plenty found in the asset management industry itself. The most obvious ones are between capital allocators and funds focused on private equity and venture capital. Valuations of investments can easily be influenced by fund managers as they are discretionary, which typically leaves investors in the dark about the true state of their portfolios until investments are sold, which often takes years.

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