Chasing Two Rabbits: Challenges in Benchmarking Liquid Alternatives

The Journal of Index Investing 6, 80-85, 2015

Posted: 9 Dec 2015

See all articles by J. Christopher Hughen

J. Christopher Hughen

University of Denver - Daniels College of Business

Date Written: June 1, 2015

Abstract

Liquid alternatives are required to compare their performance to a broad-based market index. Despite their objective to offer low correlations with equity returns, these funds provide traditional equity indexes as benchmarks 2.5 times more than any other benchmark category. By pursuing strategies unrelated to their primary benchmarks, liquid alternatives can generate significant tracking errors, which cause biased information ratios. We review the challenges of benchmarking liquid alternatives and recommend use of the downside deviation or maximum drawdown. This issue is important as research shows how performance relative to even a mismatched benchmark is a significant determinant of fund flows.

Keywords: Liquid Alternatives, Benchmark

JEL Classification: G20

Suggested Citation

Hughen, John Christopher, Chasing Two Rabbits: Challenges in Benchmarking Liquid Alternatives (June 1, 2015). The Journal of Index Investing 6, 80-85, 2015, Available at SSRN: https://ssrn.com/abstract=2631185

John Christopher Hughen (Contact Author)

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd
Denver, CO 80208-8951
United States
303-803-6171 (Phone)

HOME PAGE: http://www.hughen.com

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