Why is benchmarking significant for alternative investments?

Benchmarking is significant for alternative investments primarily because it provides a framework for comparing the performance of these investments against a predetermined standard. This comparison is crucial for investors and fund managers to evaluate the success of their investment strategies. By establishing benchmarks, investors can assess whether their alternative investments are delivering returns that justify the risks taken and the costs incurred.

In the context of alternative investments, which often involve unique strategies and assets that may not correlate directly with traditional markets, having a benchmark allows for a clearer understanding of performance relative to similar investments or market indices. This can be especially important in justifying performance results to stakeholders and making informed decisions about asset allocation.

While aspects like liquidity, risk profiling, and regulatory compliance are important considerations in the management of alternative investments, they do not directly relate to the fundamental purpose of benchmarking. Benchmarking is specifically about performance measurement and evaluation, which emphasizes the importance of comparability and accountability in the investment process.