Are fee-related admin issues causing errors in your investment performance?

Sean P. Gilligan, CFA, CPA, CIPM
Managing Partner
November 5, 2015
15 min
Are fee-related admin issues causing errors in your investment performance?

Calculating gross and net investment performance should be simple, right? Yes, however, firms often face fee-related portfolio accounting or administrative issues that cause complications, resulting in inaccurate performance. It is essential that all types of fees are accounted for correctly to ensure reported performance can be relied upon for evaluation by clients and prospective investors.

Which Fees and Expenses Reduce Investment Performance?

Gross-of-fee performance represents a portfolio’s return net of transaction costs only. Net-of-fee performance is net of transaction costs and investment management fees, so the only difference between gross and net performance is the investment management fee. According to the Global Investment Performance Standards (GIPS®), investment management fees are defined to include both asset-based and performance-based fees that are earned for managing a portfolio.

If your firm is GIPS compliant, it is important to reduce performance by both types of fees when calculating net-of-fee performance. For non-GIPS compliant firms, this is still considered best practice; however, it is common for firms with both types of fees to report performance reduced only by the asset-based fee as “Net” and performance reduced by both the asset-based fee and performance-based fee as “Net Net.”

Administrative fees, such as custody fees, do not reduce performance. This is the typical practice because clients have some control over selecting a custodian and, therefore, the administrative fees charged to their portfolio. For this reason, administrative fees are excluded from performance calculations and instead are treated like external cash flows that do not reduce their return.

The most common exception to this is net performance reported for mutual funds, which is typically calculated based on the change in the fund’s net asset value (NAV), resulting in performance that is net of all fees and expenses. Mutual fund investors do not have control over the custodian used or administrative fees charged (i.e., the manager selects the custodian), so these fees do reduce performance when calculating net returns for mutual funds.

What Are the Most Common Fee-Related Administrative Issues and How Can They Be Addressed?

The most common administrative issues that affect performance results usually are derived from:

  1. Clients paying their management fee by check or from another outside source
  2. Accounts with bundled fee structures (e.g., wrap accounts)
  3. Accounts paying asset-based fees for transactions in lieu of per-trade commissions

We will examine each of these issues below.

1.  Clients Paying Their Management Fee by Check or from Another Outside Source

In an ideal world all clients would have their management fees directly debited from the account that earned the fee; however, this is not always the case. Some clients prefer to pay their management fees by check or out of one of their multiple accounts managed by your firm. Since many firms record their accounts receivable in an accounting system separate from their portfolio accounting system (which calculates performance), a matching entry must be added to the portfolio accounting system when fees are paid. If this fee is not recorded in the portfolio accounting system, the client’s gross and net returns will be equal (neither being reduced by the management fee), which is inaccurate.

How to Add Adjusting Accounting Entries to Ensure Net-of-Fee Performance Is Accurate

When a client pays their fee by check, to correctly record this, two entries are needed in the portfolio accounting system:

  1. An external cash inflow matching the management fees paid by check.
  2. A management fee expense for the same amount.

After these two transactions are made, the portfolio’s market value will be the same as it was before entering these transactions since the two transactions offset each other. While these entries do not change the value of the portfolio, an expense is recorded that will allow the system to report the correct net-of-fee performance for the period.

Similarly, when the management fee is directly debited from another account, adjustments need to be made to both the account that paid the fee and the account that earned the fee. The account that paid the management fee will need two accounting entries:

  1. A negative management fee expense for fees paid on behalf of a different account.
  2. An external cash outflow for the same amount.

The account that earned the management fee will also need two accounting entries (note that these are the same as the entries when paid by check):

  1. An external cash inflow matching the fees paid by the other account.
  2. A management fee expense for the same amount.

Again, these transactions will not change the market value of any account as these entries simultaneously adjust cash and management fee expense by the same amount. While this has no effect on the total portfolio’s market value, it will allow net-of fee performance to be accurately reported, regardless of the source or method of the actual payment.

Forgetting to make these adjustments is very common and often leads to erroneously overstating net-of-fee performance for clients paying their fees from an outside source. It will also result in an overstatement of net-of-fee performance for any composite that includes these accounts. To avoid regulatory deficiencies or non-compliance with GIPS requirements, it is best to look into whether your firm has accounts paying management fees from outside sources and ensure proper adjustments are made.

2.  Accounts with Bundled Fee Structures, Such as Wrap Accounts

As previously discussed, gross-of-fee performance is reduced by transaction costs and net-of-fee performance is reduced by transaction costs and management fees. This can become complicated when fees and expenses are bundled together and accounted for as one bundled fee.

What to Do If Fees and Expenses Are Bundled Together and Cannot Be Separated

If fees and expenses cannot be separated, gross-of-fee performance is calculated by reducing performance by transaction costs and any fees or expenses that cannot be separated from those transaction costs. Net-of-fee performance is then calculated by reducing performance by transaction costs and management fees, as well as any fees or expenses that cannot be separated from the transaction costs or management fees. This often results in identical gross-of fee and net-of-fee performance, as both performance measures are reduced by the entire bundled fee.

This most commonly occurs with wrap accounts, where the client pays one bundled fee and the individual fees for transaction costs, management fees, etc. cannot be separately determined. When this occurs, disclosures should be included with the performance to clarify if any fees other than transaction costs and management fees have been used to reduce performance.

Alternative Presentation Options for Gross-of-Fee and Net-of-Fee Performance With Bundled Fees

Instead of presenting gross-of-fee performance that is equal to net-of-fee performance, firms often only include net returns as their official performance, but then also present “pure gross” returns as supplemental information. Pure gross returns are gross of all fees and expenses and must be disclosed as such.

3.  Accounts That Pay Asset-Based Fees for Transactions in Lieu of Per-Trade Commissions

As discussed earlier, gross-of-fee performance is reduced by transaction costs. Typically these transaction costs are the commissions tied to each executed trade; however, there has been a trend towards using asset-based fee structures for transaction costs, instead of per-trade commissions.

If an account is actively managed and trades frequently enough that an asset-based fee structure results in lower expenses than paying commissions on each trade, an asset-based fee structure may be a good option for your client. However, properly accounting for this kind of fee structure in your portfolio accounting system may be challenging, as many portfolio accounting systems have not caught up with this trend, leading to errors in the client’s reported performance.

With a commission-based structure, portfolio accounting systems typically account for each trade net of commissions, which ensures that gross-of-fee performance is net of transaction costs. All other fees and expenses are recorded as separate line items that are coded as either “performance affecting” (e.g., management fees, which reduce performance to arrive at net-of fee-returns), or “non-performance affecting” (e.g., administrative fees, which are treated as external cash flows that do not have an effect on performance).

When asset-based fee structures replace per-trade commissions, the asset-based fee is commonly accounted for as a line item, similar to management fees or other administrative expenses. The problem with this is that neither of the two options available (“performance-affecting” or “non-performance-affecting”) reduce gross-of-fee performance to account for trading costs. Instead, these options were only designed to reduce net-of-fee performance or reduce neither performance measure (i.e., there is often no transaction code that only reduces gross-of-fee performance).

How to Make Adjustments to Properly Account for Asset-Based Transaction Costs

Many systems have not created a solution for asset-based transaction costs, leaving firms to develop their own workarounds to reduce gross-of-fee returns. One example of a workaround that firms use is to record these fees as negative dividends, which results in the desired effect of reducing gross-of-fee performance. While this approach works, it is not ideal since the dividend transaction code is not intended to be used for this purpose, and should only be used as a short-term solution until your portfolio accounting system provider can offer an appropriate transaction code that will properly account for this type of fee.

Firms that have accounts with this type of fee structure for transaction costs should check with their portfolio accounting system provider to confirm if there is a way to ensure these fees are accounted for properly. Ideally, this should be addressed with a system developer or senior representative from your system provider, as this question is likely beyond the knowledge of a typical helpdesk associate, and may not be addressed in the reference materials they have available to them.

While this post is focused on fee-related administrative issues that affect performance, there are many other fee-related issues that firms face in reporting investment performance. We intend to cover additional fee-related topics in future posts, including: determining whether to use cash basis or accrual accounting for management fees, and considerations for determining when it is appropriate to use hypothetical or model management fees instead of actual management fees to calculate net-of-fee performance. If you would like to receive periodic information on these kinds of topics, please subscribe to our blog by submitting your email at the bottom of the webpage or check back frequently for new posts.

For more information on fee-related administrative issues or to discuss other investment performance or GIPS® topics, please contact Sean Gilligan at sean@longspeakadvisory.com.

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When you're responsible for overseeing the performance of an endowment or public pension fund, one of the most critical tools at your disposal is the benchmark. But not just any benchmark—a meaningful one, designed with intention and aligned with your Investment Policy Statement(IPS). Benchmarks aren’t just numbers to report alongside returns; they represent the performance your total fund should have delivered if your strategic targets were passively implemented.

And yet, many asset owners still find themselves working with benchmarks that don’t quite match their objectives—either too generic, too simplified, or misaligned with how the total fund is structured. Let’s walkthrough how to build more effective benchmarks that reflect your IPS and support better performance oversight.

Start with the Policy: Your IPS Should Guide Benchmark Construction

Your IPS is more than a governance document—it is the road map that sets strategic asset allocation targets for the fund. Whether you're allocating 50% to public equity or 15% to private equity, each target signals an intentional risk/return decision. Your benchmark should be built to evaluate how well each segment of the total fund performed.

The key is to assign a benchmark to each asset class and sub-asset class listed in your IPS. This allows for layered performance analysis—at the individual sub-asset class level (such as large cap public equity), at the broader asset class level (like total public equity), and ultimately rolled up at the Total Fund level. When benchmarks reflect the same weights and structure as the strategic targets in your IPS, you can assess how tactical shifts in weights and active management within each segment are adding or detracting value.

Use Trusted Public Indexes for Liquid Assets

For traditional, liquid assets—like public equities and fixed income—benchmarking is straightforward. Widely recognized indexes like the S&P 500, MSCI ACWI, or Bloomberg U.S. Aggregate Bond Index are generally appropriate and provide a reasonable passive alternative against which to measure active strategies managed using a similar pool of investments as the index.

These benchmarks are also calculated using time-weighted returns (TWR), which strip out the impact of cash flows—ideal for evaluating manager skill. When each component of your total fund has a TWR-based benchmark, they can all be rolled up into a total fund benchmark with consistency and clarity.

Think Beyond the Index for Private Markets

Where benchmarking gets tricky is in illiquid or asset classes like private equity, real estate, or private credit. These don’t have public market indexes since they are private market investments, so you need a proxy that still supports a fair evaluation.

Some organizations use a peer group as the benchmark, but another approach is to use an annualized public market index plus a premium. For example, you might use the 7-year annualized return of the Russell 2000(lagged by 3 months) plus a 3% premium to account for illiquidity and risk.

Using the 7-year average rather than the current period return removes the public market volatility for the period that may not be as relevant for the private market comparison. The 3-month lag is used if your private asset valuations are updated when received rather than posted back to the valuation date. The purpose of the 3% premium (or whatever you decide is appropriate) is to account for the excess return you expect to receive from private investments above public markets to make the liquidity risk worthwhile.

By building in this hurdle, you create a reasonable, transparent benchmark that enables your board to ask: Is our private markets portfolio delivering enough excess return to justify the added risk and reduced liquidity?

Roll It All Up: Aggregated Benchmarks for Total Fund Oversight

Once you have individual benchmarks for each segment of the total fund, the next step is to aggregate them—using the strategic asset allocation weights from your IPS—to form a custom blended total fund benchmark.

This approach provides several advantages:

  • You can evaluate performance at both the micro (asset class) and macro (total fund) level.
  • You gain insight into where active management is adding value—and where it isn’t.
  • You ensure alignment between your strategic policy decisions and how performance is being measured.

For example, if your IPS targets 50% to public equities split among large-, mid-, and small-cap stocks, you can create a blended equity benchmark that reflects those sub-asset class allocations, and then roll it up into your total fund benchmark. Rebalancing of the blends should match there balancing frequency of the total fund.

What If There's No Market Benchmark?

In some cases, especially for highly customized or opportunistic strategies like hedge funds, there simply may not be a meaningful market index to use as a benchmark. In these cases, it is important to consider what hurdle would indicate success for this segment of the total fund. Examples of what some asset owners use include:

  • CPI + Premium – a simple inflation-based hurdle
  • Absolute return targets – such as a flat 7% annually
  • Total Fund return for the asset class – not helpful for evaluating the performance of this segment, but still useful for aggregation to create the total fund benchmark

While these aren’t perfect, they still serve an important function: they allow performance to be rolled into a total fund benchmark, even if the asset class itself is difficult to benchmark directly.

The Bottom Line: Better Benchmarks, Better Oversight

For public pension boards and endowment committees, benchmarks are essential for effective fiduciary oversight. A well-designed benchmark framework:

  • Reflects your strategic intent
  • Provides fair, consistent measurement of manager performance
  • Supports clear communication with stakeholders

At Longs Peak Advisory Services, we’ve worked with asset owners around the globe to develop custom benchmarking frameworks that align with their policies and support meaningful performance evaluation. If you’re unsure whether your current benchmarks are doing your IPS justice, we’re hereto help you refine them.

Want to dig deeper? Let’s talk about how to tailor a benchmark framework that’s right for your total fund—and your fiduciary responsibilities. Reach out to us today.

Valuation Timing for Illiquid Investments
Explore how firms & asset owners can balance accuracy & timeliness in performance reporting for illiquid investments.
June 23, 2025
15 min

For asset owners and investment firms managing private equity, real estate, or other illiquid assets, one of the most persistent challenges in performance reporting is determining the right approach to valuation timing. Accurate performance results are essential, but delays in receiving valuations can create friction with timely reporting goals. How can firms strike the right balance?

At Longs Peak Advisory Services, we’ve worked with hundreds of investment firms and asset owners globally to help them present meaningful, transparent performance results. When it comes to illiquid investments, the trade-offs and decisions surrounding valuation timing can have a significant impact—not just on performance accuracy, but also on how trustworthy and comparable the results appear to stakeholders.

Why Valuation Timing Matters

Illiquid investments are inherently different from their liquid counterparts. While publicly traded securities can be valued in real-time with market prices, private equity and real estate investments often report with a delay—sometimes months after quarter-end.

This delay creates a reporting dilemma: Should firms wait for final valuations to ensure accurate performance, or should they push ahead with estimates or lagged valuations to meet internal or external deadlines?

It’s a familiar struggle for investment teams and performance professionals. On one hand, accuracy supports sound decision-making and stakeholder trust. On the other, reporting delays can hinder communication with boards, consultants, and beneficiaries—particularly for asset owners like endowments and public pension plans that follow strict reporting cycles.

Common Approaches to Delayed Valuations

For strategies involving private equity, real estate, or other illiquid holdings, receiving valuations weeks—or even months—after quarter-end is the norm rather than the exception. To deal with this lag, investment organizations typically adopt one of two approaches to incorporate valuations into performance reporting: backdating valuations or lagging valuations. Each has benefits and drawbacks, and the choice between them often comes down to a trade-off between accuracy and timeliness.

1. Backdating Valuations

In the backdating approach, once a valuation is received—say, a March 31 valuation that arrives in mid-June—it is recorded as of March 31, the actual valuation date. This ensures that performance reports reflect economic activity during the appropriate time period, regardless of when the data became available.

Pros:
  • Accuracy: Provides the most accurate snapshot of asset values and portfolio performance for the period being reported.
  • Integrity: Maintains alignment between valuation dates and the underlying activity in the portfolio, which is particularly important for internal analysis or for investment committees wanting to evaluate manager decisions during specific market environments.
Cons:
  • Delayed Reporting: Final performance for the quarter may be delayed by 4–6 weeks or more, depending on how long it takes to receive valuations.
  • Stakeholder Frustration: Boards, consultants, and beneficiaries may grow  frustrated if they cannot access updated reports in a timely manner, especially if performance data is tied to compensation decisions, audit     deadlines, or public disclosures.

When It's Useful:
  • When transparency and accuracy are prioritized over speed—e.g., in annual audited performance reports or regulatory filings.
  • For internal purposes where precise attribution and alignment with economic events are critical, such as evaluating decision-making during periods of market volatility.

2. Lagged Valuations

With the lagged approach, firms recognize delayed valuations in the subsequent reporting period. Using the same example: if the March 31valuation is received in June, it is instead recorded as of June 30. In this case, the performance effect of the Q1 activity is pushed into Q2’sreporting.

Pros:
  • Faster Reporting: Performance reports can be completed shortly after quarter-end, meeting board, stakeholder, and regulatory timelines.
  • Operational Efficiency: Teams aren’t held up by a few delayed valuations, allowing them to close the books and move on to other tasks.

Cons:
  • Reduced Accuracy: Performance reported for Q2 includes valuation changes that actually occurred in Q1, misaligning performance with the period in which it was earned.
  • Misinterpretation Risk: If users are unaware of the lag, they may misattribute results to the wrong quarter, leading to flawed conclusions about manager skill or market behavior.

When It's Useful:
  • When quarterly reporting deadlines must be met (e.g., trustee meetings, consultant updates).
  • In environments where consistency and speed are prioritized, and the lag can be adequately disclosed and understood by users.

Choosing the Right Approach (and Sticking with It)

Both approaches are acceptable from a compliance and reporting perspective. However, the key lies in consistency.

Once an organization adopts an approach—whether back dating or lagging—it should be applied across all periods, portfolios, and asset classes. Inconsistent application opens the door to performance manipulation(or the appearance of it), where results might look better simply because a valuation was timed differently.

This kind of inconsistency can erode trust with boards, auditors and other stakeholders. Worse, it could raise red flags in a regulatory review or third-party verification.

Disclose, Disclose, Disclose

Regardless of the method you use, full transparency in reporting is essential. If you’re lagging valuations by a quarter, clearly state that in your disclosures. If you change methodologies at any point—perhaps transitioning from lagged to backdated—explain when and why that change occurred.

Clear disclosures help users of your reports—whether board members, beneficiaries, auditors, or consultants—understand how performance was calculated. It allows them to assess the results in context and make informed decisions based on the data.

Aligning Benchmarks with Valuation Timing

One important detail that’s often overlooked: your benchmark data should follow the same valuation timing as your portfolio.

If your private equity or real estate portfolio is lagged by a quarter, but your benchmark is not, your performance comparison becomes flawed. The timing mismatch can mislead stakeholders into believing the strategy outperformed or underperformed, simply due to misaligned reporting periods.

To ensure a fair and meaningful comparison, always apply your valuation timing method consistently across both your portfolio and benchmark data.

Building Trust Through Transparency

Valuation timing is a technical, often behind-the-scenes issue—but it plays a crucial role in how your investment results are perceived. Boards and stakeholders rely on accurate, timely, and understandable performance reporting to make decisions that impact beneficiaries, employees, and communities.

By taking the time to document your valuation policy, apply it consistently, and disclose it clearly, you are reinforcing your organization’s commitment to integrity and transparency. And in a world where scrutiny of investment performance is only increasing, that commitment can be just as valuable as the numbers themselves.

Need help defining your valuation timing policy or aligning performance reporting practices with industry standards?

Longs Peak Advisory Services specializes in helping investment firms and asset owners simplify their performance processes, maintain compliance, and build trust through transparent reporting. Contact us to learn how we can support your team.

Key Takeaways from the 2025 PMAR Conference
This year’s PMAR Conference delivered timely and thought-provoking content for performance professionals across the industry. In this post, we’ve highlighted our top takeaways from the event—including a recap of the WiPM gathering.
May 29, 2025
15 min

The Performance Measurement, Attribution & Risk (PMAR) Conference is always a highlight for investment performance professionals—and this year’s event did not disappoint. With a packed agenda spanning everything from economic uncertainty and automation to evolving training needs and private market complexities, PMAR 2025 gave attendees plenty to think about.

Here are some of our key takeaways from this year’s event:

Women in Performance Measurement (WiPM)

Although not officially a part of PMAR, WiPM often schedules its annual in-person gathering during the same week to take advantage of the broader industry presence at the event. This year’s in-person gathering, united female professionals from across the country for a full day of connection, learning, and mentorship. The agenda struck a thoughtful balance between professional development and personal connection, with standout sessions on AI and machine learning, resume building, and insights from the WiPM mentoring program. A consistent favorite among attendees is the interactive format—discussions are engaging, and the support among members is truly energizing. The day concluded with a cocktail reception and dinner, reinforcing the group’s strong sense of community and its ongoing commitment to advancing women in the performance measurement profession.

If you’re not yet a member and are interested in joining the community, find WiPM here on LinkedIn.

Uncertainty, Not Risk, is Driving Market Volatility

John Longo, Ph.D., Rutgers Business School kicked off the conference with a deep dive into the global economy, and his message was clear: today’s markets are more uncertain than risky. Tariffs, political volatility, and unconventional strategies—like the idea of purchasing Greenland—are reshaping global trade and investment decisions. His suggestion? Investors may want to look beyond U.S. borders and consider assets like gold or emerging markets as a hedge.

Longo also highlighted the looming national debt problem and inflationary effects of protectionist policies. For performance professionals, the implication is clear: macro-level policy choices are creating noise that can obscure traditional risk metrics. Understanding the difference between risk and uncertainty is more important than ever.

The Future of Training: Customized, Continuous, and Collaborative

In the “Developing Staff for Success” session, Frances Barney, CFA (former head of investment performance and risk analysis for BNY Mellon) and our very own Jocelyn Gilligan, CFA, CIPM explored the evolving nature of training in our field. The key message: cookie-cutter training doesn't cut it anymore. With increasing regulatory complexity and rapidly advancing technology, firms must invest in flexible, personalized learning programs.

Whether it's improving communication skills, building tech proficiency, or embedding a culture of curiosity, the session emphasized that training must be more than a check-the-box activity. Ongoing mentorship, cross-training, and embracing neurodiversity in learning styles are all part of building high-performing, engaged teams.

AI is Here—But It Needs a Human Co-Pilot

Several sessions explored the growing role of AI and automation in performance and reporting. The consensus? AI holds immense promise, but without strong data governance and human oversight, it’s not a silver bullet. From hallucinations in generative models to the ethical challenges of data usage, AI introduces new risks even as it streamlines workflows.

Use cases presented ranged from anomaly detection and report generation to client communication enhancements and predictive exception handling. But again and again, speakers emphasized: AI should augment, not replace, human expertise.

Private Markets Require Purpose-Built Tools

Private equity, private credit, real estate, and hedge funds remain among the trickiest asset classes to measure. Whether debating IRR vs. TWR, handling data lags, or selecting appropriate benchmarks, this year's sessions highlighted just how much nuance is involved in getting private market reporting right.

One particularly compelling idea: using replicating portfolios of public assets to assess the risk and performance of illiquid investments. This approach offers more transparency and a better sense of underlying exposures, especially in the absence of timely valuations.

Shorting and Leverage Complicate Performance Attribution

Calculating performance in long/short portfolios isn’t straightforward—and using absolute values can create misleading results. A session on this topic broke down the mechanics of short selling and explained why contribution-based return attribution is essential for accurate reporting.

The key insight: portfolio-level returns can fall outside the range of individual asset returns, especially in leveraged portfolios. Understanding the directional nature of each position is crucial for both internal attribution and external communication.

The SEC is Watching—Are You Ready?

Compliance was another hot topic, especially in light of recent enforcement actions under the SEC Marketing Rule. From misuse of hypothetical performance to sloppy use of testimonials, the panelists shared hard-earned lessons and emphasized the importance of documentation. This panel was moderated by Longs Peak’s Matt Deatherage, CFA, CIPM and included Lance Dial, of K&L Gates along with Thayne Gould from Vigilant.

FAQs have helped clarify gray areas (especially around extracted performance and proximity of net vs. gross returns), but more guidance is expected—particularly on model fees and performance portability. If you're not already documenting every performance claim, now is the time to start.

“Phantom Alpha” Is Real—And Preventable

David Spaulding of TSG, closed the conference with a deep dive into benchmark construction and the potential for “phantom alpha.” Even small differences in rebalancing frequency between portfolios and their benchmarks can create misleading outperformance. His recommendation? Either sync your rebalancing schedules or clearly disclose the differences.

This session served as a great reminder that even small implementation details can significantly impact reported performance—and that transparency is essential to maintaining trust.

Final Thoughts

From automation to attribution, PMAR 2025 showcased the depth and complexity of our field. If there’s one overarching takeaway, it’s that while tools and techniques continue to evolve, the core principles—transparency, accuracy, and accountability—remain as important a sever.

Did you attend PMAR this year? We’d love to hear your biggest takeaways. Reach out to us at hello@longspeakadvisory.com or drop us a note on LinkedIn!