What's Benchmark Got To Do With It


In the April 14th edition of the Economist, there’s an article titled Gavea Investments: A Shore Thing, about a $7Bn Brazilian Macro hedge fund run by Arminio Fraga. The following passage grabbed my attention especially after the recent post on Seth Klarman and the topic of a proper benchmark given the increasingly global implications of inflation and foreign exchange. The Economist wrote:

“Running a hedge fund in Brazil is rather different from doing so in other places…Interest rates remain high: the benchmark rate is 9.75%. Local hedge funds report their performance relative to that rate. Gavea keeps around 80% of its book in cash and only takes a position when it strongly believes it can beat the risk-free return.”

The language implies that Brazilian hedge funds (regardless of mandate/strategy) use the Brazilian local “risk-free” interest rate as their performance benchmark. In contrast, most US-based hedge funds use domestic equity indices as their performance benchmark (e.g., S&P 500 and Dow)

Over the last 20 years, asset bases have become increasingly diverse and global, as emerging markets have gained prominence and wealth. US-based funds now have many international clients. US-based investors now make international investments (most investment columns seem to advise at least a sliver of international or emerging market allocation).

As East meets West, North meets South, etc., it is time for portfolio managers and fund investors to set aside tradition and industry standard practice, and begin to reconsider the “proper” investment benchmark?