Views on improving the integrity of global capital markets
25 June 2012

Coming to a Hedge Fund Near You: GIPS Guidance for Alternative Investment Strategies, Structures

Jonathan Boersma, CFA

The GIPS® standards are designed to address a broad range of investments, including marketable securities, hedge funds, private equity, real estate, and other alternative investments. While a firm that manages alternative investments has always been able to comply with the GIPS standards, there are unique features and characteristics that can make compliance challenging. So we developed new guidance to address hedge funds and other alternative investment strategies and structures to help firms apply the GIPS standards in these areas. 

It is important to note that the guidance is not only relevant for “alternative” managers, but also for many traditional managers who utilize certain investment strategies and portfolio structures. Indeed, all firms claiming compliance with the GIPS standards must comply not only with the standards themselves, but also with all updates, Guidance Statements, interpretations, Q&As, and clarifications published by the GIPS Executive Committee, which are available on the GIPS standards website.

The much-anticipated GIPS Guidance Statement on Alternative Investment Strategies and Structures was adopted by the GIPS Executive Committee in May. This Guidance Statement is the result of four years of development, a public comment period that generated over 40 very detailed comments from around the world, countless hours and dedication by volunteers serving on the Alternative Investment Strategies Working Group, the GIPS Interpretations Subcommittee, and the GIPS Executive Committee, and CFA Institute staff.

We had two main objectives in developing this guidance:

  1. Dispel the perception that the GIPS standards are not applicable to some alternative investments such as hedge funds, and reinforce that compliance with the standards applies to all asset classes, strategies, and investment vehicles.
  2. Address various technical issues specific to alternative investments that were not explicitly addressed by the GIPS standards, including:
  • Valuations when investments are not fully liquid
  • Frequency of valuation of portfolios
  • Estimated versus final values
  • Return calculations
  • Treatment of fees in a master-feeder structure
  • Treatment of master-feeder structures with regard to composite construction
  • Benchmarks
  • Risk Measures
  • Segregated investments (“side pockets”)

The Guidance Statement addresses the above and other key areas of interest and uncertainty identified by the industry; a number of Q&As provide further guidance by addressing specific situations and examples.

The Guidance Statement on Alternative Investment Strategies and Structures, which will go into effect on 1 October 2012, won’t have to be applied retroactively. However, firms may voluntarily choose to apply this Guidance Statement retroactively, and in such an event, must disclose if any restatement of the historical track record was necessary as a result of the retroactive application.

Since its introduction in 1999, the GIPS standards have been recognized as industry best practice for calculating and reporting investment performance. Firms that claim compliance with the GIPS standards help to assure investors that investment performance is completely and fairly represented.

About the Author(s)
Jonathan Boersma, CFA

Jonathan Boersma, CFA, is the former head of Professional Standards and former executive director of the GIPS standards at CFA Institute. He was responsible for developing, maintaining, and promoting the GIPS standards, Code of Ethics and Standards of Professional Conduct, and other CFA Institute standards of practice.

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