The task of choosing benchmarks for alternative investment asset classes is made even harder when leverage is added into the equation.
One of the biggest questions is how much leverage is used, said Allan Emkin, Los Angeles-based managing principal at investment consultant Meketa Investment Group Inc. "If there is leverage, that can change everything," he said.
Credit funds often use leverage, said Steven Kaplan, the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.
"This makes them a little more equity-like," Mr. Kaplan said. "The credit funds are the toughest ones (to benchmark) because they are taking on some leverage."
In private equity, whether leverage is taken into consideration can turn an outperforming private equity investment into an underperforming investment.
After adjusting for such factors as leverage, risk and illiquidity, "it is more challenging to make the case that private equity does better" than the public markets, said Josh Lerner, the head of the Entrepreneurial Management Unit and the Jacob H. Schiff Professor of Investment Banking at Harvard Business School.
"It does not do worse but it (private equity) doesn't obviously do better," Mr. Lerner said.
Even without adjusting for leverage or risk, private equity only outperforms the public markets by around 5%, he said.