I agree that funds should be compared with like funds. But leaving it there still leaves something of a vacuum. Event-driven Fund A might be better than event-driven fund B, but they both might be crap in comparison to a simple standard benchmark, even when adjusted for risk. I think benchmarks serve a purpose.
True. Benchmarks do serve a purpose and I am not suggesting investors don't use them. You need someway of knowing whether or not your investment was a good idea. To me, the best option is to have various measuring sticks to analyze your investment from various angles.
Yes you would benchmark a hedge fund compared to what universe they invest in. An equity hedge fund investing in global equities would be benchmarked e.g. vs a global stock index (unhedged USD). Why would you benchmark a 100% equity hedge fund to a 60/40 equity/bond allocation is beyond me. Dan Loeb's Third Point for example invests in US equities and corporate bonds. Hence it makes sense to benchmark his fund against something like 50% S&P 500 and 50% of an investment grade 5y corporate bond index.
Agreed. I analyze and track hedge funds as part of my job and we use some combination of LIBOR +% to benchmark our funds over the long run as a proxy for opportunity cost. Ranging from LIBOR + 3%-6% depending on the expected volatility of the strategy. In the short run, and when trying to compare funds against each other, we use an index or blended index that matches the outlined strategy.