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

Manager versus factor-based benchmark selection

September 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • 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


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.

However, even mutual fund managers have an influence on how their investment performance is portrayed. Naturally, they can not influence the valuations of stocks or bonds as these are publicly traded securities, so need to be marked-to-market, but fund managers can select a benchmark that is most favorable to them. 

Given this, manager selection can be challenging as it is difficult to assess what should be the most appropriate benchmark for performance evaluation. Simply relying on the choice of the manager is not a sound strategy for capital allocators (try Finominal’s Alpha Analyzer for finding the best benchmark).

Fortunately, factor exposure analysis can be used to systematically select a benchmark with a similar investment style, which we explore in this research article.


We use the ARKK Innovation ETF (ARKK) as a case study in this analysis. The ETF has become one of the best-known thematic ETFs traded in the U.S. given its performance and media-savvy fund manager – Ms. Cathie Wood. ARKK currently manages more than $8 billion, is actively managed, and owns a highly concentrated portfolio of stocks.

The ETF’s factsheet shows the S&P 500 as the primary benchmark. Contrasting the performance between ARKK and its benchmark highlights an almost i