Mind the GAP: Questioning the Investment Manager’s Stated Benchmark

Selecting and monitoring fund investments is an arduous task, with no guarantee of success. For the majority of funds, the investment and due diligence process involves an evaluation of past performance and risk exposure relative to some benchmark. Thus, the choice of benchmark is critical in this context, and simply adopting the investment manager’s stated benchmark for fund analysis may not yield accurate results. To help with this task, I developed the concept of “GAP” analysis—an easy-to-calculate measure for identifying the presence and extent of sub-optimality of the stated benchmark.