equity market neutral

[Question]
benchmark: 30-day Treasury bill rate + a spread of 250 bps

The intended benchmark for hedge fund investments would be most appropriate for:

A. distressed securities funds.
B. equity market neutral funds.
C. fixed income arbitrage funds.

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[Answer]
B

Because

• while "application of some universal benchmark, no matter how well constructed, is unlikely to capture the essence of all hedge funds' performances"
• "the hedge fund strategy that comes closer to pure risk-free arbitrage is equity market neutral."

It is reasonable to benchmark risk-free arbitrage against the risk free rate plus a spread to represent return required to compensate for management fees.