Debate continues to rage over the primacy of relative return and absolute return approaches to evaluate investment performance. A relative return approach involves measuring a portfolio of assets against a market-based benchmark, which bears many of the risk/return characteristics of the underlying portfolio. In contrast, absolute return benchmarking involves measuring performance against cash or inflation targets.

The selection of either approach involves a conscious decision at the beginning of any client relationship on risk exposure. Adopting a market-based benchmark implies the passive acceptance by the investor of that market risk, adjusted for any outperformance or underperformance of that benchmark by the manager. In a bull market, such an approach tends to raise few questions as investors benefit from the rising market tide. In a bear market, however, the converse is true.