I analyze the results of a long-short investment strategy on European mutual funds. I would like to compare the performance of the strategy to a benchmark. But not wanting to bias the results, I would like to differentiate between active and passive strategies and therefore compare the results of my active strategy with an "active benchmark". Do you have any idea about which benchmark I should use?

Thanks to those who will take the time to answer me.

  • Are you assuming the the active benchmark will be higher then the passive benchmark? Jun 13 '20 at 11:56
  • I'd say the opposite. Active strategies on mutual funds would give weaker results than passive strategies. More specifically, since the results may vary depending on the approach (passive vs. active), I would like to know if there is a direct "active" benchmark.
    – Vanie_B
    Jun 13 '20 at 13:03

I would suggest that you select a benchmark that best reflects the sector or market that your mutual fund(s) is in. For the USA, the IWM or SPY would be good proxies for the market. If sector oriented, consider the SPDR ETFS (finance, health, technology, energy, etc.).

I'm not sure what the difference between an active or passive benchmark is not am I clear as to what a "long-short investment strategy on European mutual funds" is (pairs trading?). It would seem to me that regardless of the benchmark chosen, the results of the comparison would be the relative performance of your strategy as well as when it out or under performs the benchmark. For me, the latter would be the more important info.

  • Briefly, my strategy consists in taking a long or short position on mutual funds based on last month's observations (depending on the disconnection of the fund from its reference cluster). Every month I rebalance my portfolio and I recompose it on the basis of the new observations. So I was looking for a benchmark to compare the monthly returns of my portfolio. I had also thought of using as a benchmark, the weighted average monthly returns of all the mutual funds in question over the same period in order to see if my strategy outperforms or underperforms. What do you think about this?
    – Vanie_B
    Jun 13 '20 at 19:03
  • I would attempt to keep it as simple as possible. Use the average return of all funds in consideration as the benchmark. Weighting them in some fashion injects a new variable, namely your opinion of what the weighting should be. Another important consideration apart from the net return of your strategy is the draw downs. IMO, a strategy that provides almost the same return as the benchmark but has far lower draw downs would also be worthwhile Jun 13 '20 at 19:49
  • Thank you @BobBaerker for your response! I regressed my portfolio (model 4-F) and my benchmark (the average returns of the funds) to compare the alphas. I have a negative and significant alpha for the strategy and a positive but not significant alpha for the funds. Does this mean that my strategy is underperforming since the fund/benchmark performance is no statistically different from 0?
    – Vanie_B
    Jun 14 '20 at 7:59
  • I think that once you settle on a benchmark, you're going to have to grind out the performance of your strategy and analyze it over different periods of time. Your results data is going to give you most of the answers. Jun 14 '20 at 15:42
  • @Vanie_B What's a "model 4-F"?
    – Flux
    Nov 10 '20 at 23:26

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