Delegating Benchmarks: Aligning Incentives for Better Total Fund Performance

Benchmarks are essential to institutional investing, but their dual role—as both strategic references and measures of execution—can create structural tensions. When applied at the asset-class level, benchmarks may inadvertently encourage behaviors such as index tracking, beta tilts, or localized outperformance that do not always align with total fund objectives. This article explores an alternative governance model in which the board anchors the total fund benchmark, while the investment executive (IE)—the CEO, CIO, and their team—designs mandate-level benchmarks. A stylized, game-theoretic model shows that delegation reduces benchmark gaming, supports the generation of uncorrelated alpha, and enables more efficient capital allocation. The expected outcome is stronger risk-adjusted returns, more diversified sources of alpha, and improved retention of top investment talent. With appropriate guardrails and oversight, delegated benchmarking restores benchmarks to their intended role: providing clear accountability for execution in service of long-term total fund success.