Anyone have a good idea? I was thinking for a section of a wrap fee program that will include real estate, precious metals, commodities (Oil, grains)? I thought of using the HFRI FOF but that doesn’t quite work. Any ideas?
Not aware of an index that does that, but there are several funds. The oldest and most well known is PRPFX. There are about a dozen other multi-asset alternative funds out there. Some of fund-of-funds, which I don’t really care for. Others offer a form of slice management that have a bit more flexibility.
Either a blended benchmark based on weightings of the AIs in that sleeve or I just use a absolute return for a client-facing benchmark.
Yeah I’m aware of the Permanent Portfolio. If their ever was a guy with a horseshoe up his you know what it’s that funds PM. If gold had tanked he’d be beyond broke, but it’s paid off so far. He’s bottom 1% this past month with gold tanking, I suspect once gold finally drops down to earth, you’ll see PRPFX shed AUM real quick. Unit.Root yeah that’s what I was thinking, but I was hoping that there was something easier for clients. Things like the GSCI index don’t include real estate so I can’t really use that.
Edit: Are you looking for a benchmark for your alternative slice, or an investable fund/index to use in your slice?
Index for my alternative slice
We just use a simple 8% absolute return to bench our alternatives slice which includes HFs, commodities, RE, etc…
8% absolute seems harsh in years like this one when the market is getting crushed.
You can try benchmarking with managed futures index, that should be perfect to your needs.
Blended benchmark is the way to go.
I view the benchmark as what you should invest in if you don’t have any views. An investor might prefer a portfolio with a 10% standard deviation. I could optimize and find the optimal 10% standard deviation portfolio and use that as a benchmark before putting any of my views on top of it. The 10% standard deviation portfolio would not be consistent through time and would adjust to changing market conditions. That’s a problem for most people since they prefer a pre-set list of securities, like 60/40 allocation between stocks/bonds. Regardless, for many an alternatives fund, they aren’t performing a benchmark-relative optimization anyway. They are optimizing based on total returns. For instance, there’s no investment out there that will return the risk-free rate plus 8%. Why bother pretending that there is? Well that would be because they link performance fees to “benchmarks”. Well then, just call 8% plus risk-free the performance target and say you try to make absolute returns without too much risk.
8% is tough in down markets, but easily explained in that its a long-term benchmark. We also use a blended benchmark for more detailed clients. End of the day, the choice was ease of explanation over best fit, true-est benchmark.