GIPS Compliance and Hedge Funds: Yes, It Is Possible and Necessary
Since the financial crisis, investors are more interested than ever in the ethics and integrity of investment management firms. Since their introduction in 1999, the GIPS standards have been recognized as industry best practice for calculating and reporting investment performance — allowing investors to make “apples-to-apples” comparisons of investment performance and performance presentation across different countries. There are now 32 GIPS sponsors that contribute to the development and promotion of the GIPS standards.
Firms that claim compliance with the GIPS standards help to assure investors that they are adhering to a voluntary set of ethical principles, and that investment performance is completely and fairly represented. Both prospective and existing clients of investment management firms benefit from the GIPS standards by having a greater degree of confidence in the performance being presented to them.
The GIPS standards are high-level principles designed to address a broad range of investments, including marketable securities, hedge funds, private equity, real estate, and other alternatives. And while many investment firms globally managing alternative investments (including hedge funds) currently claim compliance with the GIPS standards, in the last several years we have heard that there is a misconception that they are not applicable to hedge funds or other alternative investment strategies and portfolio structures. It was important to provide additional guidance and interpretation addressing some of the complexities of applying the GIPS standards to alternative investment strategies and portfolio structures.
To that end, the GIPS Executive Committee recently approved the much anticipated Guidance Statement on Alternative Investment Strategies and Structures and has released an exposure draft (PDF) for a 90-day public comment period ending 15 June 2011. This Guidance Statement — which is expected to be effective at the beginning of 2012 — provides insight on topics such as the treatment of side pockets, master-feeder structures, illiquidity, management fees, and hedging. Because the term “alternative” can mean many different things to different people with regard to investments and portfolio structures, it is critical for all firms claiming compliance with the GIPS standards, both traditional managers and alternatives managers, to consider this proposed guidance. Indeed, all firms claiming compliance with the GIPS standards must adhere to all of the guidance statements, whether they are traditional investment managers or hedge fund managers.
While the exposure draft includes questions to elicit a response from the reader, it is important for people to comment on any part of the Guidance Statement they feel is important, even if there isn’t a specific question focused on an individual section. Comments should both be critical in nature and positive where it meets with your approval. In addition, suggested solutions to problems raised in your comment letter are always appreciated. Each comment received during the public comment period will be considered and weighed carefully to create the final guidance statement. Please visit the GIPS standards website for additional details on how to provide a comment letter on the Guidance Statement on Alternative Investment Strategies and Structures Exposure Draft.