The GIPS Standards and Alternatives: CalPERS Takes Notice, Others Likely to Follow

With more than 30 GIPS sponsors and broad support from the industry, the Global Investment Performance Standards (GIPS®) are seen by many investors as a required way of doing business for any investment managers they hire. But alternatives managers have lagged behind traditional managers in claiming compliance with the GIPS standards. Some of the reasons we have heard in the past are that alternatives are too complex, the GIPS standards do not cover these kinds of strategies, and our clients are not demanding it.

We believe these things are now changing for a number of reasons. First, as alternative strategies increasingly become mainstream and investors and consultants are more particular about their due diligence processes, complying with the GIPS standards will help alternatives managers stand out from the crowd. One of the most important nuggets revealed at the 2015 GIPS Annual Conference in San Diego is that CalPERS has created a policy of asking every one of its managers seeking new business whether they are compliant with the GIPS standards. This is significant because, face it, it is CalPERS and most managers will take the necessary steps to win its business. It is also important because CalPERS manages a large portion of its traditional investment strategies internally. Therefore, by definition, the alternative strategies firms that CalPERS employs will field this question in their RFPs. Also, CalPERS is a leader in the industry, and other asset owners are paying attention. We also hear from various verification and consulting firms that more and more alternatives firms are contacting them to find out how to comply with the GIPS standards.

Second, in 2012 we issued the GIPS Guidance Statement on Alternative Investment Strategies and Structures to provide specific guidance on many of the complexities firms managing alternative strategies face. Issues like master-feeder structures, side-pockets, fees, illiquid and hard-to-value investments, multi-asset portfolios, longer lock-ups, and many others are clarified. The only strategies or investments that are precluded in a GIPS-compliant firm are those that cannot be fair-valued.

To shed light on this issue, the Regulatory Compliance Association (RCA) recently held a webinar to explain the GIPS standards to alternatives managers and attracted more than 3,600 participants. I moderated the panel, which featured professionals from all areas of the business talking about why it is important for firms managing alternative strategies to comply with the GIPS standards.

Karyn Vincent, CFA, CIPM, managing partner at ACA Performance Services, spoke about GIPS requirements and compliance challenges that apply to hedge funds, private equity, and private real estate, and why these firms should comply.

Phillip Vitale, CFA, chief investment officer at Filament, LLC (a consulting firm that regularly recommends and hires alternatives managers on behalf of asset owners) discussed his view that firms complying with the GIPS standards have a culture of excellence and integrity, that they exhibit their transparency and sensitivity to client needs, and that they show proactive leadership.

Aaron De Angelis, chief compliance officer at Spring Mountain Capital, discussed how complying with the GIPS standards instills essential internal controls and is needed to compete for institutional business.

Steven Furst, CFA, CIPM, vice president of performance and attribution at Ares Management, L.P., discussed how firms can bridge gaps between what the standards require and what prospects may expect, strategies for engaging the whole firm in the GIPS standards compliance process, and why it is important for alternative asset managers to claim compliance.

It was interesting to hear the experienced professionals on the panel — a verifier, consultant, chief compliance officer, and head of performance managing alternative strategies — all agree that the GIPS standards are important to them for a variety of good reasons. If this trend continues and more asset owners and firms take notice, we anticipate a sea change for the investment industry.

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Image credit: iStockphoto.com/Nikada