Set out the difficulties that arise when choosing benchmarks for alternative investments

Alternatives resist the tests of a good benchmark. Hedge funds use leverage, short positions and shifting exposures, so weights and active positions are ill-defined, broad indexes fit poorly and absolute return targets ignore market conditions. Peer-group indices are not investable and suffer from survivorship and backfill bias, with strategies too varied to compare. Private equity and real estate rely on appraisal values, which smooth returns, understate volatility and correlation, and lag market moves; cash flows are irregular and controlled by the manager, so money-weighted returns and comparisons such as a public market equivalent are used. Commodity indexes differ in weighting and roll methods. A good answer explains why no single benchmark suffices and proposes a blend of custom, factor and peer comparisons.