Since their introduction in 1999, the Global Investment Performance Standards (GIPS) have been recognized as industry best practice for providing investors with a better understanding of historical investment performance among global investment management firms. Due to the fact that these standards give asset owners more confidence and trust over performance reporting, along with increased transparency, there is now a visible growing interest in attaining GIPS compliance among the hedge fund community.
An Overview of GIPS
The GIPS are voluntary and universal standards used to calculate and present investment performance based on fair representation and complete disclosure principles. By choosing to comply with the GIPS, hedge funds can assure investors that their reported historical track record is complete and fairly represented. The increasing demand for transparency in the market by investors, and even greater demands from regulatory bodies and lawmakers, has resulted in the acceptance of GIPS as a practical and detailed framework.
In line with these developments, GIPS has gained a broader, global acceptance across the industry as it is developed by CFA Institute, the GIPS Standards Sponsors and GIPS Standards Committees. To keep the GIPS standards current within this dynamic marketplace, the CFA Institute periodically proposes revisions to the standards and seeks feedback from the public. For instance, in July, the CFA Institute released the “Exposure Draft of the Verification Procedures for the ESG Disclosure Standards for Investment Products,” which is open for comment until September 21st, 2021.
Why Should Hedge Funds Comply with GIPS?
The GIPS are high-level principles designed to address a broad range of investments. There are several benefits of complying with GIPS, including:
- Credibility: Voluntary commitment to follow standards based on fair representation and full disclosure principles gives credibility and reinforces trust.
- Consistency: Adherence to best practices concerning the valuation of investments brings in a level of consistency and cohesiveness to performance reporting.
- Fraudulent Conduct Claims: Commitment to the presentation of performance that is consistent, transparent and comparable helps firms keep up with the requirements of the SEC and other regulatory bodies.
- Robustness: Establishing robust investment performance procedures and policies is a requirement of any investment manager that asset owners engage with.
What Changed with GIPS 2020?
There have been several changes to the GIPS that have made it easier for hedge funds to ensure compliance:
- Compliance is at a firm-wide level instead of a fund or strategy level; therefore, GIPS is reflected on all assets within a firm.
- Complying with GIPS input data requirements has become much simpler with the abundance of available options at managers’ disposal.
- The use of third-party administrators is admissible along with the requirement of monthly return calculation and NAV, both with exceptions.
- Calculations of net performance for pooled funds have a number of acceptable options, thereby easing the reporting process.
While there are challenges associated with ensuring GIPS compliance, these progressive changes along with a robust data warehouse solution can assist hedge funds on their journey. IVP Data Warehouse (Polaris) provides support for dynamic IRRs, time-weighted returns and a full data audit as well as the ability to access and report on historical data. With features like dashboards, optimized workflows, advanced performance tracking, and streamlined reporting and analytics capabilities, firms are provided with the tools required for successful GIPS compliance.
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