Public Market Equivalents: Methods and Considerations
Timothy F. Peterson, CFA, CAIA

We address the challenges of selecting suitable benchmarks for alternative investment strategies and specifically evaluate commonly used Public Market Equivalent (PME) methodologies. Benchmarking challenges for alternatives are aggravated by many factors. Among these are the illiquid nature of many alternative instruments, the lack of the notion of passive investing in alternative investment management, and substantial differences between the portfolio management processes of securitized versus non-securitized assets. Existing PME approaches have merit but each has its own set of limitations. We provide a summary and review of each method to better inform practitioners of the differences among each. We also briefly discuss how the choice of underlying benchmark can influence the PME calculation. The most recent methodology, Direct Alpha, appears to offer the greatest ease of implementation as well as congruence with modern portfolio theory.