What is a challenge when establishing a returns-based benchmark?

When establishing a returns-based benchmark, one of the main challenges is the potential inability to establish a statistically reliable style pattern. Returns-based benchmarks analyze a portfolio's performance based on its returns compared to an established benchmark to determine the style or strategy being employed. However, if the sample size of performance data is too small or the time period selected does not capture enough market cycles, the result may not reflect a consistent or statistically valid style pattern. This lack of reliability can lead to misinterpretation of the manager's investment strategy, making it difficult for investors to make informed decisions.

Other options present various challenges or characteristics that are not pertinent to the primary difficulties encountered in constructing a returns-based benchmark. For instance, requiring limited observation time may hinder the development of a robust benchmark, but it does not wholly capture the statistical reliability issue. Similarly, the idea that it always satisfies validity criteria is misleading, as numerous factors can complicate or compromise the validity of returns-based benchmarks. Finally, the concept of universal acceptance across all asset classes is not realistic, as different asset classes may have distinct characteristics that require tailored benchmarks rather than a one-size-fits-all approach.