I got a kick out of this article about how Paul Singer of Elliott Management Corp doesn’t like to have his hedge fund compared to a benchmark and his peers. He’s quoted saying:
“We also try really hard not to be benchmarked against other funds, in order to create as much breathing room as possible”.
Of course you wouldn’t want to be benchmarked against any other fund! Wouldn’t it be great if we could all go to work and never get compared to our peers? Wouldn’t it be great if you could convince your boss that you’re such a unique worker that you shouldn’t be compared to anyone else? That way you can lag or charge in time in which you didn’t perform well and it doesn’t matter. After all, if the boss can’t compare you to anyone then he can’t actually quantify your performance relative to someone else who could be performing the job.
And that’s ultimately what benchmarking achieves. Benchmarking is a crucial and very necessary part of evaluating portfolio managers. If we don’t have proper benchmarks to compare managers against then we can’t see whether they’re adding value or if they’re just sucking fees out of our pockets for no good reason. Unfortunately, most people I know and most of the fund services I see don’t benchmark properly and don’t know how to evaluate a fund’s performance.
Anyhow, benchmarks matter. They matter a lot. And any competitive fund manager who doesn’t like being benchmarked is forgetting that he’s competing for his client’s assets every waking moment of his fund’s life. Portfolio managers work for their clients and their clients should be able to evaluate the manager relative to other options so that they know if they should fire that manager. Managers should embrace the benchmarks. Unless you can’t beat them. In that case, you should definitely complain about them. Luckily for Singer and Elliott Management that’s not a problem.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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