Benchmarking Strategy for Private Equity Fund Performance

Very Hard Performance Evaluation Benchmarking

Congratulations! You have just been appointed as the Chief Investment Officer of a large pension fund that has recently undergone a comprehensive review of its performance evaluation methods. To ensure consistency across all investment strategies and accurately measure the fund’s performance, the board has requested that you develop a formal benchmarking strategy.

During the discussion, it was highlighted that the chosen benchmark should not only reflect the investment objectives but also be relevant to the fund's particular investment style. As the CIO, you are considering three potential benchmarks for a newly introduced private equity fund that invests primarily in mid-market buyout opportunities.

With these considerations in mind, which of the following benchmarking strategies would best illustrate an appropriate performance evaluation framework for this private equity fund?

Using the public market equivalent (PME) to measure the private equity fund’s performance against a public equity index.

Selecting a custom index that combines multiple private equity fund performance metrics relevant to mid-market buyouts over a similar time horizon.

Utilizing a cash-weighted return benchmark derived from historical fund cash flows without adjustment for market conditions.

Hint

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