Quality Control: How to check for errors in your investment performance
Sean P. Gilligan, CFA, CPA, CIPM
Managing Partner
May 5, 2021
15 min
Recent investment performance calculation mistakes at Pennsylvania Public School Employees’ Retirement System (“PSERS”) have highlighted the importance of quality control reviews and raises questions about where risk exists, how these risks can be mitigated, and what role independent verifications should play in the quality control process.
What happened at PSERS?1
An error in the return calculation for Pennsylvania’s $64 billion state public school employee retirement plan has had serious implications for its beneficiaries and those involved in the calculation mistake.
In 2010, the plan, which was already underfunded, entered into a risk-sharing agreement where employees hired after 2011 would pay more into the plan if the return (average time-weighted return) over a specific time period fell below the actuarial value of asset (AVA) return of 6.36%.
In December 2020, the board announced that the plan had achieved a return of 6.38%, a mere 2 basis points above the minimum threshold. But in March the board changed its tune, announcing that the calculation was incorrect and the 100,000 or so employees hired since 2011 (and their employers) should have actually paid more into the plan.
What’s worse is PSERS also announced that the FBI is investigating the organization, although details of the probe have not yet been released.
According to PSERS, a consultant, that had calculated the return, came forward and admitted to the calculation error. But the board also said that it is looking into potential cover up by its staff. From what we know, at least 3 independent consultants were involved in providing data used for the calculations, calculating the returns, and verifying the returns. So, with all these experts involved, how could this happen and what can your firm do to avoid a similar situation?
Key issues to address in an investment performance quality control process
Firms should develop sound quality control processes to help identify errors before results are published. Often these processes either do not exist or are insufficient to identify issues. Following a robust quality control process that considers the key risks involved and then finds ways to mitigate these risks greatly increases the accuracy of presented investment performance.
Although we do not yet know the cause of the errors found in the PSERS case, we can highlight a few primary reasons errors occur in investment performance reporting. Primarily, errors found in published performance results are caused by:
- Key Issue # 1 – Issues in the underlying data (e.g., incorrect or missing prices, unreconciled data, missing transactions, misclassified expenses, or failing to accrue fixed income)
- Key Issue #2 – Mistakes in calculations (e.g., manual calculations that fail to match the intended methodology)
- Key Issue #3 – Errors in reporting (e.g., publishing numbers that do not match the calculated results)
A robust quality control process should specifically address all three of these areas.
Considerations when designing a robust quality control process
Key Issue #1 – Issues in the underlying data
As they say, garbage in, garbage out. It is important to ask and address questions confirming the validity of data before it is used to calculate performance. Specifically, consider how the data used in the calculations is gathered, prepared, and reconciled before completing the calculations. Is there any formal signoff from the operations team confirming that the data is ready for use? Has a review of the data been conducted by an operations manager prior to this confirmation being made?
While deadlines to get performance published can be tight, taking the time to ensure that the underlying data is final and ready to use before performance is calculated can prevent headaches later on.
The following is a list of issues to look for when testing data validity:
- Outlier performance – Portfolios performing differently than their peers may indicate a data issue or that the portfolio is mislabeled (i.e., tagged to a different strategy than it is invested in).
- Differences between ending and beginning market values – Generally, we expect a portfolio’s market value at the end of one month and the beginning of the next month to be equal (unless using a system where external cashflows are recorded between months and differences like this are expected). Flagging differences can help identify data issues.
- Offsetting decrease/increase in market value – Market values that suddenly increase or decrease and then return to the original value may have an incorrect price or transaction that should be researched.
- Gaps in performance – A portfolio whose performance suddenly stops and then restarts may have missing data.
- 0% returns – The portfolio may have liquidated and may no longer be under the firm’s discretionary management.
- Very low market values – The portfolio may have closed and is only holding a small residual balance, which should be excluded from the firm’s discretionary management.
- Net-of-fee returns higher than gross-of-fee returns – Seeing net returns that are higher than gross returns could indicate a data issue unless there are fee reversals you are aware of (e.g., performance fee accruals where previously accrued fees are adjusted back down).
- Gross-of-fee returns and net of-fee returns are equal – If gross-of-fee and net-of-fee returns are always equal for a fee-paying portfolio, it is likely that the management fees are paid from an outside source (paid by check or out of a different portfolio). The returns labelled as net-of-fee in a case like this should be treated as gross-of-fee returns.
Key Issue #2 – Mistakes in calculations
Mistakes happen, but there are ways to reduce their frequency and impact. First, you’ll want to consider how manual your performance calculations are as well as the experience of the person completing the calculations.
Let’s face it, Excel is probably the most widely used tool in performance measurement, especially for smaller firms. While many firms likely find Excel to be a user-friendly tool for calculating performance statistics, it has its limitations. Studies have shown that up to 90% of spreadsheets contain errors and spreadsheets with lots of formulas are even more likely to contain mistakes. Whether it’s not properly dragging down a formula or referencing the wrong cell, fundamentally, the biggest problem is that users do not check their work or have carefully outlined procedures for confirming accuracy.
Although this may seem obvious, having a second set of eyes on a spreadsheet can save you from the embarrassing headache of having to explain errors in performance calculations. It is even better if this review is a multi-layered process. Having someone review details as well as someone to do a high-level “gut-check” to make sure the calculations and results make sense can reduce this risk. Depending on the size of your firm, this may be easier to accomplish with a third-party consultant, where you serve as a final layer of review.
Having this final “gut-check” can help prevent avoidable errors prior to publication. We find that this final “gut-check” is best performed by someone who knows the strategy intimately rather than a performance or compliance analyst, as these individuals may be too focused on the calculation details to take a step back and consider whether the returns make sense for the strategy and are in line with expectations.
If you use software to calculate performance, you can significantly reduce the risk of manual error, but due diligence should still be performed from time to time to manually prove out the accuracy of the calculations completed in the program. This does not need to be done every time but should be conducted when introducing a new software system and any time changes are made to the program.
Key Issue #3 – Errors in reporting
It may seem silly, but many performance reporting errors come from transposing strategy and benchmark returns in presentations or placing the return of one strategy in the factsheet of another. Therefore, it is important to consider how the final performance figures make it from the system or spreadsheet into the performance presentations. Are they typed? Copy and pasted? Or are the performance reports generated directly out of a system? It’s not enough to complete the calculations correctly, the final reports must also be accurate, so adding a step to review this is crucial.
A similar review process to the one described above can really make a difference, but ultimately, understanding the vulnerabilities of your performance reporting will help you design quality control procedures that address any exposure.
Calculations completed by external performance consultants
Whether performance is calculated internally or by a third-party performance consultant, the same key issues should be considered when designing the quality control process. Due diligence should be done on the performance consulting firm to evaluate the level of experience the firm has with calculating investment performance and what kind of quality control process they follow prior to providing results to your firm. This information will help you determine what reliance you can place on their procedures and what your firm should still check internally.
For example, outsourcing performance calculations to an individual or single-person firm likely necessitates a more in-depth review since this individual would not have the ability to have a second set of eyes on the results prior to providing them to your firm. However, even larger performance consulting firms with robust quality control processes may not have intimate knowledge of your strategies, meaning that, at a minimum, a final “gut-check” should be done by your firm prior to publication.
Reliance on independent performance verification firms to find errors
Many firms that hire performance verification firms rely on their verifier to be their quality control check; however, this may not be a good practice for a variety of reasons. If this is a common practice at your firm, you may want to check the scope of your engagement before relying too heavily on your verifier to find errors.
Verification is common for firms that claim compliance with the Global Investment Performance Standards (GIPS®). But even firms that claim compliance with the GIPS standards and receive a firm-wide verification are required to disclose that, “…Verification does not provide assurance on the accuracy of any specific performance report.”
This is because verifiers are primarily focused on the existence and implementation of policies and procedures. While their review may help identify errors that exist in the sample selected for testing, it specifically does not certify the accuracy of presented results. While the verification process is valuable and often does turn up errors that need to be corrected, regardless of the scope of your engagement, a robust internal quality control process is likely still warranted.
Firms that are not GIPS compliant may engage verification firms for various types of attestation or review engagements like strategy exams or other non-GIPS performance reviews. In these situations, the scope of the engagement may be customized to meet the needs (and budget) of the firm seeking verification. A clear understanding of exactly what is in-scope and specifically what the verifier is opining on when issuing their report is key.
Situations where the engagement entails a detailed attestation tracing input data back to independent sources, confirming that calculations are carried out consistently, and verifying that published results match the calculations, allow for heavy reliance on the verifier as part of your quality control process.
Alternatively, when the scope merely consists of a high-level review confirming the appropriateness of the calculation methodology, a much more robust internal quality control process should be applied.
Knowing the scope of the engagement your firm has established with the verification firm is an important element in determining how much reliance can put on their review and findings, which can then be incorporated into the design of your own internal quality control procedures.
Key take-aways
Mistakes happen in investment performance reporting, but a robust quality control process can greatly mitigate this risk. Understanding the risks that exist, designing processes to test these risk areas, and understanding the role and engagement scope of all consultants involved are essential items in designing a quality control procedure that work for your firm – and hopefully one that will help you avoid situations like what happened with PSERS.
If you are not sure where to begin, we have tools and services available to help. Longs Peak uses proprietary software to calculate and analyze performance. Our software helps flag possible data issues and outlier performers and also produces performance reports directly from our performance system.
In addition, our performance consultants are available to work with your team to help identify potential vulnerabilities in your performance reporting process and can help you develop better quality control procedures, where needed.
Questions?
If you would like to learn more about our quality control process or any of the services we offer (like data and outlier testing) to help improve the accuracy and reliability of investment performance, contact us or email Sean Gilligan directly at sean@longspeakadvisory.com.
1 For more information on PSERS, please see this article from the Philadelphia Inquirer.
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Part 2: Creating GIPS Policies and Procedures
June 22, 2017
15 min
Calculation Methodology, Books & Records, Composite Definitions & Rules, and Error Correction Policies
As discussed in Part 1 of this two part series, GIPS compliant firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow. This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s policies and describe the procedures the firm follows to maintain its compliance.
In Part 1 of this two part series we covered Firm Definition and Definition of Discretion. Now, in Part 2 we will cover calculation methodology, books and records, composite definitions and rules, as well as error correction policies.
https://www.youtube.com/watch?v=UhaTy-4c-EM&feature=emb_logo
Calculation Methodology
While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting portfolios, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P. This section is typically broken down to separately discuss portfolio-level calculation methodology and composite-level calculation methodology.
The main consideration when establishing your firm’s portfolio-level methodology is the treatment of external cash flows. Since the start of 2010, GIPS requires firms to revalue for all “large” cash flows. It is up to your firm to define the term “large,” but it should be defined based on when your firm feels that estimation methods, such as Modified Dietz, lose their accuracy. Most portfolio accounting systems either value portfolios daily (essentially defining “large” as 0%) or value portfolios for all cash flows 10% or greater. Firms without a portfolio accounting system that are calculating their portfolio-level performance more manually (e.g., in Excel) frequently use 20%, but higher than that is less common.
With regard to composite-level performance, the most important information to document is the method used to asset-weight the portfolio returns to get the composite-level performance results. This is typically achieved through one of the following three methods:
- Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value and then sum the portfolios’ weighted returns to get the composite return for the month.
- Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value plus weighted cash flows and then sum the portfolios’ weighted returns to get the composite return for the month.
- Aggregate the underlying data of all portfolios in the composite and then calculate the performance for each month as if all of the aggregated data is for one large portfolio.
This section should also include information regarding how the other required GIPS statistics are calculated, such as dispersion and 3-year annualized ex post standard deviation. Here, it is important to note whether these statistics are calculated based on gross or net-of-fee returns, whether calculated by your portfolio accounting system or outside the system, (e.g., in Excel) and the specific standard deviation formula used to do the calculation (e.g., a population or sample based formula).
Policies Regarding Books and Records
Firms must be able to support all information included in GIPS compliant presentations as well as support that their client assets are real. This section of your GIPS P&P can outline the types of records that are maintained and in what format/location they are stored. Specifically, firms typically outline the types of documents they have (e.g., custodial statements, records maintained within a portfolio accounting system, printed records from a former portfolio accounting system such as holdings reports, transaction summaries, etc.). In this section, it is also important to mention whether files are hardcopy or electronic, whether they are maintained onsite or offsite, and if there is a limit to the amount of time they are saved.
Composite Definitions and Rules
irms must create policies to ensure that portfolios are placed in the appropriate composite for the correct time period. The timing of portfolio movement in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. For example, firms typically either set a policy based on the amount of time passed since discretion was granted or based on when the portfolio becomes “fully invested” – which must be clearly defined.
For example, if based on time, the policy may be written as, “portfolios are included in the composite at the start of the first full month under management.” If based on when the portfolio becomes fully invested, the policy may be written to state, “portfolios are included in the composite at the start of the first full month after the portfolio is at least 90% invested in line with the strategy.” The percentage set can be whatever your firm feels is appropriate, but you want to establish a clear threshold that can be followed. Simply stating “fully invested” is subjective and difficult to follow consistently.
Other rules can also be documented in this section such as minimum asset levels and significant cash flow thresholds, to keep portfolios out of composites during periods where the intended strategy cannot be fully implemented. Minimum asset levels set for GIPS composite purposes are different than minimums your firm may set for marketing purposes. While your firm can state any marketing minimum you wish based on the size portfolios you hope to attract, the minimum set for composite inclusion must be based on the minimum amount needed to fully implement that strategy. For example, even if your firm states that your strategy has a $1M minimum, portfolios accepted below this threshold must still be included in the composite if they can be managed the same as the portfolios over $1M. In this example, if you determine that below $500k you can no longer diversify the same way as you do for your larger portfolios, then $500k would be an appropriate minimum to set for composite inclusion purposes.
A significant cash flow policy can be established if your firm is concerned with very large cash flows moving in or out of a portfolio. Often these cash flows affect the portfolio’s performance and could distort the composite’s statistics. Firms wishing to implement a significant cash flow policy establish a threshold for the size of a cash flow (typically based on the percentage of the portfolio’s beginning of month market value) that would trigger the temporary removal of the portfolio from the composite while trading takes place to accommodate the cash flow.
This “significant” cash flow threshold is different than the “large” cash flow threshold discussed in the calculation methodology section. While the “large” cash flow threshold is set to improve the mathematical accuracy of the performance calculation, the “significant” cash flow threshold is based on the size of a cash flow that disrupts the actual management of the portfolio. Significant cash flows often lead to distorted performance figures that were out of the portfolio manager’s control in terms of timing or amount.
Error Correction Policies
Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material. Defining materiality thresholds can be difficult, but CFA Institute, in conjunction with the United States Investment Performance Committee (USIPC), conducted a GIPS error correction survey seeking information regarding the typical materiality thresholds used by GIPS compliant firms. We recommend reviewing the Executive Summary of this survey’s results to get an idea of the thresholds that have been set by your peers.
Typically, thresholds are set that define the level when an error becomes a material error. Anything above the threshold would require the firm to redistribute an amended GIPS compliant presentation to any prospective client or clients that relied on the erroneous presentation. This amended GIPS compliant presentation would also need to include a disclosure that explains the correction. Anything below the materiality threshold will only trigger a correction for future distributions, but no disclosure or redistribution of previously circulated presentations.
Updates for GIPS 2020
The GIPS standards were updated in 2020. Check out our post How to Update Your GIPS P&P for GIPS 2020 to make sure your P&Ps are consistent with these changes.
Want to Learn More?
If you have any questions about the GIPS Standards, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis.
GIPS Compliance Actions for the New Year 2020
January 9, 2022
15 min
Your firm works hard to comply with the Global Investment Performance Standards (GIPS®) and likely expects the benefits of GIPS to far outweigh any burden associated with maintaining compliance. Most of the policies and procedures your firm set when first becoming compliant will never need to change; however, as both the standards and your firm evolves, it is beneficial to conduct a high-level review of your GIPS compliance each year. This high-level review will help ensure that you continually refine your processes and policies to maximize the benefits of claiming compliance with GIPS year after year.
This year, conducting a review of your firm’s GIPS compliance is especially important because of the 2020 Edition of the GIPS Standards that was published in mid-2019. For information specific to the 2020 changes, please check out 2020 GIPS Standards: Prepare for the Changes.
Even without the release of a new edition of the standards, each year you should conduct a review. In the review, you should first make sure you have the right people involved. One person or department may be responsible for managing the day-to-day tasks that maintain your GIPS compliance; however, high-level oversight from a larger group should take place to help ensure that any decisions made or policies set will integrate well with your firm’s other strategic initiatives. This larger group, often called a GIPS Committee, typically consists of representatives from compliance, marketing, portfolio management, operations/performance, and senior management.
Not everyone on the committee needs to be an expert in the GIPS standards. In fact, many will not be. What they will need is to be available to share their opinions and represent their department’s interests when establishing or changing key policies for your firm. Your GIPS compliance expert/manager can set the agenda for your meeting and can provide any background on the requirements that will be part of the discussion. If you do not have a GIPS expert internally, or need independent advice about your policies and procedures, a GIPS consultant can be hired to help.
High-Level GIPS Topics to Consider Annually
Once you select the right group to represent each major area of your firm, the following high-level questions can help determine if any action is necessary to improve your GIPS compliance this year:
- Have there been any changes to the GIPS standards?
- Have there been any material changes to your firm or strategies?
- Do your composites meaningfully represent your strategies or should their structure and descriptions be reconsidered?
- Are the materiality thresholds stated in your error correction policy appropriate for the type of strategies you manage and are they consistent with the thresholds set by similar firms?
- Are you satisfied with the service received from your GIPS verifier for the fee that is paid?
- Is there any due diligence you need to conduct on your verification firm?
Changes to the GIPS Standards
It is important to consider whether there have been any changes to the GIPS standards since last year that would require your firm to take action. For example, if a new requirement is adopted, you should consider if any changes to your firm’s policies and procedures or GIPS Reports are needed.
Keep in mind that GIPS compliant firms must comply with all requirements of the GIPS standards including any updates that may be published in the form of Guidance Statements, Questions & Answers (Q&As), or other written interpretations.
If your firm is verified or works with a GIPS consultant, these GIPS experts are likely keeping you informed of any changes to the standards. The best way to check for changes yourself is to visit the “Standards & Guidance” section of www.gipsstandards.org. Specifically, you should check the “GIPS Q&A Database” where you can enter the effective date range of the previous year to see every Q&A published during this period. You should also check the “Guidance Statements” section. The guidance statements are organized by year published, so it is easy to see when new statements are added.
With the new 2020 Edition of the GIPS Standards, a review of the changes to determine how they affect your firm is especially important this year. These changes must be fully adopted before presenting returns in your GIPS reports for periods ending on 31 December 2020 or later.
Changes to Your Firm or Strategies
Similar to changes in the standards, it is important to also consider whether any changes to your firm or its strategies would require you to take action. Examples include, material changes in the way a strategy is managed, a new strategy that was launched, an existing strategy that closed, mergers or acquisitions, or anything else that would be considered a material event for your firm.
Even if no changes were made this year, you should still read your entire policies and procedures document at least annually to make sure it adequately and accurately describes the actual practices followed by your firm. Regulators, such as the Securities and Exchange Commission (SEC), commonly review firms’ policies and procedures to ensure 1) that the document includes actual procedures and is not simply a list of policies and 2) that the stated procedures truly represent the procedures followed by the firm. Many firms have created their policies and procedures document based on template language, so tweaks may be necessary to customize the document for your firm.
Meaningful Composite Structure
The section of your GIPS policies and procedures requiring the most frequent adjustment is your firm’s list of composite descriptions, as you must make changes each time a new composite is added or if a composite closes. However, even without adding new strategies or closing older strategies, the list of composite descriptions should be reviewed at least annually to ensure they are defined in a manner that best represents the strategies as you manage them today.
Since your firm’s prospects will compare your composite results to those of similar firms, it is important that your composites provide a meaningful representation of your strategies and are easily comparable to similar composites managed by your competitors. If a review of your current list of composite descriptions leads you to realize that your strategies are defined too broadly, too narrowly, or in a way that no longer accurately describes the strategy, changes can be made (with disclosure).
Keep in mind that changes should not be made frequently and cannot be made for the purpose of making your performance appear better. Changing your composite structure for the purpose of improving your performance results, as opposed to improving the composite’s representation of your strategy, would be considered “cherry picking.”
Two examples of cases that may require a change in your composites include:
- A strategy has evolved and certain aspects of the way the strategy was managed and defined in the past are different from today. This can be addressed by redefining the composite. Redefining the composite requires you to disclose the date and description of the change. This disclosure will help prospects understand how the strategy was managed for each time period presented and when the shift in strategy took place. Changes like this should be made to your composite descriptions at the time of the change, but an annual review can help you address any items that may have been overlooked when the change occurred.
- A composite is defined broadly to include all large capitalization accounts. Within this large capitalization composite, there are accounts with a growth focus and others with a value focus. If your closest competitors are separately presenting large capitalization growth and large capitalization value composites, your broadly defined large capitalization composite may be difficult for prospects to meaningfully compare to your competitors. To address this, you can create new, more narrowly defined composites to separate the accounts with the growth and value mandates. In this case, the full history will be separated and the composite creation date disclosed for these new composites will be the date you make the change. Note that this will demonstrate to prospective clients that you had the benefit of hindsight when determining the definition.
Materiality Thresholds Stated in Your Error Correction Policy
Another section of your firm’s GIPS policies and procedures that should be reviewed in detail is your error correction policy. Your error correction policy includes thresholds that pre-determine which errors (of those that may occur in your GIPS Reports) are considered material versus those deemed immaterial. These thresholds cannot be changed upon finding an error; however, they can be updated prospectively if you feel a change would improve your policy.
Many firms had a difficult time setting these thresholds when this requirement first went into effect back at the start of 2011. Now that much more information is available to help you determine these thresholds, such as the GIPS Error Correction Survey, you may want to revisit your policy to ensure it is adequate.
Setting and approving materiality thresholds that determine material versus immaterial errors is a task best suited for your firm’s GIPS committee rather than your GIPS department or manager. The reason for this is that opinions of what constitutes a material error will vary from one department to another. Your committee can help find a balance between those with a more conservative approach and those with a more aggressive approach to ensure the thresholds selected are appropriate.
GIPS Verifier Selection and Due Diligence
If your firm is verified, it is important to periodically evaluate whether you are satisfied with the quality of the service received for the fees paid. You may also want to consider whether you need to conduct any periodic due diligence on your verification firm with respect to data security or other concerns important to your firm.
With several mergers, acquisitions, and start-ups in the verification community over the last few years, you may need to do some research to ensure you are familiar with what your options are when selecting a verification firm.
All verifiers have the same general objective: to test and opine on 1) whether your firm has complied with all of the composite construction requirements of the GIPS standards and 2) whether your firm’s GIPS processes and procedures are designed to calculate and present performance in compliance with GIPS. Where they differ is in the fees charged and process followed to complete the verification.
With regard to fees, much of the difference between verifiers is based on their level of brand recognition rather than differences in the quality of their service. For example, smaller firms specialized in GIPS verification may have more experience with the intricacies of GIPS compliance than a global accounting firm; yet, a global accounting firm will likely charge a higher fee. When selecting a higher fee firm, it is important to consider whether the higher fee is offset by the benefit your firm receives when listing their brand name as your verifier in RFPs you complete.
With regard to process, the primary difference between verification firms is whether the verification testing is done onsite or remotely. There are pros and cons to both methods and it is important for your firm to consider which works best for the team that is fielding the verification document requests. The onsite approach may result in finishing the verification in a shorter period, but may be disruptive to your other responsibilities while the verification team is in your office. The remote approach may be less disruptive to your other responsibilities, but likely will take longer to complete and may be less efficient as documents are exchanged back and forth over an extended period of time. Another difference is how the engagement team is structured, whether you can expect to work with the same team each year, and how much experience your main contact has.
Regardless of whether the verification is conducted onsite or remotely, be sure to ask any verifier how your proprietary information and confidential client data is protected. If the work is done remotely, how are sensitive documents transferred between your firm and the verifier (e.g., is it through email or a secure portal) and once received by the verifier, do they have strong controls in place to ensure your data is not breached.
If the work is done onsite, it is important to ask what documents (or copies of documents), if any, the verifier will be taking with them when they leave, and whether these documents are saved in a secure manner. Documents saved locally on a laptop are at higher risk of being compromised.
Questions?
For more information on how to maximize the benefits your firm receives from being GIPS compliant or for other investment performance and GIPS compliance information, contact Sean Gilligan at sean@longspeakadvisory.com.
How to Become GIPS Compliant
May 24, 2017
15 min
Many firms are interested in becoming GIPS compliant, but are intimidated by the initial process of bringing their firm into compliance. As long as you know the steps to become GIPS compliant and understand the options you have to complete each step, this process is very manageable. The information provided here is intended to provide you with a high-level overview of the steps you must complete to become GIPS compliant.
https://www.youtube.com/watch?v=E6zBnbW_OMU&feature=emb_logo
Before holding your firm out to the public as a GIPS compliant firm, there are three main steps that must first be completed. Firms must:
- Document GIPS policies and procedures
- Construct composites that consistently follow these policies and procedures
- Create compliant presentations to show the results of each composite
Document GIPS Policies and Procedures
Firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow in a document known as the firm’s GIPS Policies and Procedures (“GIPS P&P”). This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s GIPS policies as well as describe the procedures the firm follows to maintain their compliance. Examples of items typically found in this document include:
- Firm Definition – GIPS is applied to your firm as a whole, not to a single product or strategy you manage. How your firm is defined for GIPS purposes is primarily based on how the firm is held out to the public, which may differ from the legal structure of your firm.
- Definition of Discretion –Discretion is defined differently for GIPS than it typically is for legal or regulatory purposes. You may have a discretionary contract for an account that you deem to be non-discretionary for GIPS purposes because of restrictions the client places on the implementation of the strategy. The “Definition of Discretion” section of your firm’s GIPS P&P should outline objective criteria for determining the discretionary status of accounts.
- Policies Regarding Books and Records – Firms must be able to support all information included in compliant presentations as well as support that their client assets are real. This section of your P&P can outline the types of records that are maintained and in what format/location they are stored.
- Calculation Methodology – While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting accounts, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P.
- Composite Definitions and Rules – Firms must create policies to ensure that accounts are placed in the appropriate composite for the correct time period. The timing of the movement of accounts in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. Other optional rules, such as minimum account sizes and significant cash flow thresholds can also be documented here to keep accounts out of composites during periods where the intended strategy cannot be fully implemented.
- Error Correction Policies – Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material.
Construct Composites
After the GIPS P&P is created, firms can use these policies to construct the composites defined in the policy document. To do this, firms must:
- Identify all of the accounts that meet the definition of a composite. In other words, group all accounts by strategy, but then remove accounts that do not meet the firm’s definition of discretion or that do not meet a composite-specific rule, such as a minimum account size.
- Determine the correct time to include each account as well as remove any account that closed, changed strategies, or otherwise caused you to lose discretion. Portfolios must only be included in composites for periods in which they were considered discretionary for GIPS purposes. This helps ensure that the composite results accurately represent the firm’s management of the composite’s strategy and does not include outside noise created from client-requested restrictions.
- Asset-weight the monthly account-level results for each account included in the composite to calculate the composite-level performance results.
- Calculate all required composite-level statistics (see the list below) that must be included in the composite’s compliant presentation.
Create Compliant Presentations
Compliant presentations act as the firm’s external representation of their GIPS compliance and must be provided to all prospective clients. Each composite has a separate presentation that includes all of the required statistics as well as the required disclosures. Statistics included in compliant presentations include:
- Annual composite performance (gross and/or net)
- Annual benchmark performance
- Number of accounts in the composite as of each year-end
- Total assets in the composite as of each year-end
- Total assets of the GIPS firm as of each year-end
- A measure of internal dispersion for each annual period
- Three year annualized ex-post standard deviation of both the composite and the benchmark based on monthly returns
Other statistics may also be required such as the percentage of non-fee paying accounts or the percentage of bundled fee paying accounts as of each year-end, where applicable.
Want to Learn More?
If you have any questions about how to become GIPS Compliant, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis.
How to Comply with the 2020 GIPS Standards
April 23, 2020
15 min
A new decade is upon us and with the new decade comes a series of new requirements in terms of investment performance reporting for firms and asset owners that elect to claim compliance with the GIPS standards.
Many organizations have elected to adopt the 2020 edition of the GIPS standards early and have already put a solid foundation in place for the updated requirements; however, many organizations have not. The adoption deadline for all compliant organizations is rapidly approaching, so if your organization has not begun this conversion, now is the time to get started.
What is Changing and Why
It has been over a decade since the last edition of the GIPS standards was released, and quite frankly, the industry has changed since 2010. As the industry has evolved, CFA Institute has released a number of Q&A’s, guidance statements, and interpretations on how the changes in the industry impact the standards.
Ten years of updates have resulted in a vast repository of information needed to obtain the guidance required to comply. Having so many different resources for guidance (the 2010 GIPS Handbook, separate guidance statements, the Q&A database, and the GIPS Help Desk) has made managing the requirements of GIPS a pretty daunting task; thus, one of the goals of the 2020 standards is to centralize all of the updates that have come out over the past ten years. The 2020 GIPS standards consolidates many of the concepts previously addressed in guidance statements and Q&A’s, allowing the new provisions and explanation of the provisions to serve as the primary source that firms, asset owners, verifiers, and consultants can look to for guidance.
Additionally, the 2010 standards were heavily focused on composites and the traditional definition of prospective clients. Using this as the main framework is not always applicable to organizations that primarily manage pooled funds or asset owners that do not compete for business or report performance to prospective clients. To address this, CFA Institute set out to make this new edition of the standards more applicable to pooled fund managers and asset owners. These updates were designed to make claiming compliance easier and more relevant for these types of managers, while not creating additional burdens on organizations that are already compliant with GIPS. This goal is evident in the new format of the provisions, which separately focuses on requirements for investment firms, asset owners, and verifiers.
In addition to the separation of pooled funds and composites, the guidance is broader on when organizations may present money-weighted returns instead of time-weighted returns. This change now allows the decision to be based on the investment vehicle structure and who controls the timing and amount of external cash flows, rather than limiting money-weighted returns to certain asset classes. This is a welcomed update in the industry as many organizations were frustrated by requirements to calculate and present time-weighted returns when this type of return was not the most meaningful representation of how they managed their investment strategies.
How the 2020 GIPS Standards are Organized
For ease of use and navigation, the 2020 GIPS standards is broken out into three different groups of tailored provisions – firms, asset owners, and verifiers. Each containing specific requirements and recommendations applicable for that type of organization.
As an organization claiming compliance or working to become compliant for the first time, you will need to determine whether the set of requirements for firms or assets owners is applicable to your claim of compliance. The primary distinguishing factor is whether your organization competes for business and manages external money, or reports to an oversight board and manages internal money. The answer to this determines which set of tailored provisions should be followed and sets the framework for how the standards will apply.
Where to Start – GIPS Compliance Updates
Regardless of whether you are excited for the updates to the standards, they are coming and will be required for all firms and asset owners claiming compliance with GIPS. The new requirements take effect once your GIPS Reports (formerly called Compliant Presentations) present performance information that is inclusive of the period 31 December 2020.
There is a lot of information available and dissecting everything that has been released can be overwhelming. For organizations that have never claimed compliance, the good news is that the new standards are more applicable and easier to adopt than they were previously.
For most organizations currently claiming compliance, what’s great is that the new standards do not require a lot of changes, rather they mostly provide optional procedures that you may choose to adopt if you find it beneficial to do so. However, some firms will require more work.
At Longs Peak, we have created the following questionnaire designed to help you determine if converting to the 2020 GIPS standards will require more than a few minor tweaks. This list does not include all changes, but includes the top ten material changes that may require a project plan to implement the required changes by the effective date of the 2020 GIPS standards.
Answering “Yes” to any of the following questions means your organization may require more than a few quick tweaks to implement the 2020 changes:
GIPS 2020 Checklist
- Does your firm have limited distribution pooled funds (i.e., private funds that are not regulated under a framework that would permit the general public to purchase shares in the fund without a one-on-one presentation)?
- Has your firm created single account composites for pooled funds solely for the purpose of meeting the GIPS requirement of having every discretionary, fee-paying portfolio in at least one composite?
- Does your firm have multi-strategy portfolios (e.g., balanced portfolios where the equity and fixed income segments each could be represented as standalone strategies) where you would like to carve-out the individual strategies into their own composites?
- Does your firm have portfolios where actual transaction costs are unavailable (e.g., wrap accounts or other bundled fee arrangements) and you would like to estimate transaction costs to show gross-of-fee returns without labeling the returns as supplemental information?
- Does your firm have portfolios where your firm controls the amount and timing of external cash flows (other than for private equity or real estate) and you would like to present money-weighted returns rather than time-weighted returns?
- Does your firm have real estate or private equity composites?
- Does your firm include theoretical performance (e.g., model performance) as part of a GIPS report?
- Does your firm follow the Advertising Guidelines to claim compliance with the GIPS standards outside of your GIPS Reports?
- Does your firm currently update your GIPS compliant presentations more than 12 months after the year ends?
- Does your firm have advisory-only assets or uncalled committed capital you wish to present in your GIPS Report?
Although the intent is for the adoption of the standards to be more relevant, many organizations find themselves asking “where do I even begin?” The great news is that you don’t have to figure this all out on your own.
At Longs Peak, we have spent countless hours familiarizing ourselves with the new standards and have helped all of our clients begin to adopt the changes. We know what issues come up and how to navigate the changes required.
As a consultant, we do not have independence requirements like your verifier, so we can actually help you implement many of the 2020 changes required for your organization. If you do not already work with a GIPS consultant, now may be a good time to consider hiring one, especially if you lack the resources needed to get this done by the deadline to convert to the 2020 GIPS standards.
Contact us if you do not wish to read through all of the requirements and recommendations to identify what actions are required for your organization.
Finally, if you would like to read more about what changed and why, we have summarized the main changes to the GIPS standards in GIPS 2020 What’s Changing and What you Should Do.
Recommended Post
Why “Net” Is Not a One-Size-Fits-All Answer
If you’ve worked in the investment industry, you’ve probably heard some version of this question:
“Should we show net or gross performance—or both?”
On the surface, the answer seems straight forward. The rules tell us what’s required. Compliance boxes get checked. End of story.
But in practice, presenting net and gross performance is rarely that simple.
How you calculate it, how you present it, and how you disclose it can materially change how investors interpret your results. This article goes beyond the rulebook to explore thepractical considerations firms face when deciding how to present net and gross returns in a manner that is clear, helpful, and in compliance with requirements.
Let’s Start with the Basics (Briefly)
At a high level, for separate account strategies:
- Gross performance reflects returns before investment management fees
- Net performance reflects returns after investment management fees have been deducted
Both gross and net performance are typically net of transaction costs, but gross of administrative fees and expenses. When dealing with pooled funds, net performance is also reduced by administrative fees and expenses, but here we are focused on separate account strategies, typically marketed as composite performance.
Simple enough. But that definition alone doesn’t tell the full story—and it’s where many misunderstandings begin.
Why Net Performance Is the Investor’s Reality
From an investor’s perspective, net performance is what actually matters. It represents the return they keep after paying the manager for active management.
That’s why modern regulations and best practices increasingly emphasize net returns. Investors don’t experience gross returns. They experience net outcomes.
And let’s be honest: if an investor chooses an active manager instead of a low-cost index fund or ETF tracking the same benchmark, the expectation is that the active approach should deliver something extra—after fees. Otherwise, it becomes difficult to justify paying for that active management.
Why Gross Performance Still Has a Role
If net returns are what investors actually receive, why do firms still talk about gross performance at all?
Because gross performance tells a different, but complementary, story: what the strategy is capable of before fees, and what investors are paying for that capability.
The gap between gross and net returns represents the cost of active management. Put differently, it answers a question investors are implicitly asking:
How much return am I giving up in exchange for this manager’s expertise?
Viewed this way, gross returns help investors assess:
- Whether the strategy is adding value before fees
- How much of the performance is driven by skill: security selection, asset allocation or portfolio construction
- Whether fees are the primary drag—or whether the strategy itself is struggling
When gross and net returns are shown together, they create transparency around both skill and cost. When shown without context, they can easily obscure the economic tradeoff.
Gross-of-fee returns are also most important when marketing to institutional investors that have the power to negotiate the fee they will pay and know that they will likely pay a fee lower than most of your clients have paid in the past. Their detailed analysis can more accurately be done starting with your gross-of-fee returns and adjusting for the fee they expect to negotiate rather than using net-of-fee returns that have been charged historically.
The Real-World Gray Areas Firms Struggle With
How to Present Gross Returns
Gross returns are pretty straightforward. They are typically calculated before investment management or advisory fees and usually include transaction costs such as commissions and spreads.
For firms that comply with the GIPS® Standards, things can get more nuanced—particularly for bundled fee arrangements. In those cases, firms must make reasonable allocations to separate transaction costs from the bundled fee. But, if that separation cannot be done reliably, gross returns must be shown after removing the entire bundled fee. [1]
Once you move from gross to net returns, however, the conversation becomes less straightforward. We’ve had managers question, “why show net performance at all?” This is especially the case when fees vary across clients or historical fees no longer reflect what an investor would pay today. Others complain that the “benchmark isn’t net-of-fees,” making net-of-fee comparisons inherently imperfect. These concerns highlight why presenting net returns isn’t just a mechanical exercise. In the sections that follow, we’ll unpack these challenges and walk through how to present net-of-fee performance in a way that remains meaningful, transparent, and fit for its intended audience.
How to Present Net Returns
This is where judgment and documentation matters most.
Not all “net” returns are created equal. Even under the SEC Marketing Rule, there is no single mandated definition of net performance—only a requirement that net performance be presented. Under the GIPS Standards, net-of-fee returns must be reduced by investment management fees.
In practice, firms may deduct:
- Advisory fees (asset-based investment management fees)
- Performance-based fees
- Custody fees
- Transaction costs
Two net-return series can look comparable on the surface while reflecting very different assumptions underneath. This lack of transparency is one of the main reasons institutional investors often require managers to be GIPS compliant—it simplifies comparison by requiring consistency in the assumptions used and how they are presented or additional disclosure when more fees are included in the calculation than what is required.
And context matters. A higher fee may be perfectly reasonable if it reflects broader services such as tax or financial planning, holistic portfolio construction, or access to specialized strategies. The problem isn’t the fee itself, it’s failing to use a fee scenario that is relevant to the user of the report.
Deciding Between Actual vs Model Fees
The next hurdle is deciding whether to use actual fees or a model fee when calculating net returns. Historically, firms most often relied on actual fees, viewing them as the best representation of what clients actually experienced. But that approach raises an important question: are those historical fees still relevant to what an investor would pay today? If the answer is no, a model fee may provide a more representative picture of current expected outcomes. Under the SEC marketing rule, there are cases where firms are required to use a model fee when the anticipated fee is higher than actual fees charged.
This consideration becomes even more important for strategies or composites that include accounts paying little or no fee at all. While the GIPS Standards and the SEC Marketing Rule are not perfectly aligned on this topic, they agree in principle—net performance should be meaningful, not misleading, and should reflect what an actual fee-paying investor should reasonably expect to pay. Thus, many firms opt to present model fee performance to avoid violating the marketing rule’s general prohibitions. [2]
Additional SEC guidance published on Jan 15, 2026 on the Use of Model Fees reinforced that the decision to use model vs actual fees is context-dependent. While the marketing rule allows net performance to be calculated using either actual or model fees, there are cases where the use of actual fees may be misleading. The SEC emphasized flexibility and that while both fee types are allowed, what’s appropriate depends on the facts and circumstances of the situation, including the clarity of disclosures and how fee assumptions are explained.
Which Model Fee Should Be Used?
Most firms offer multiple fee structures, typically based on account size, but sometimes also on investor type (institutional versus retail clients). That variability makes fee selection a key decision when presenting net performance.
If you plan to use a single performance document for broad or mass marketing, best practice—and what the SEC Marketing Rule effectively requires—is to calculate net returns using the highest anticipated fee that could reasonably apply to the intended audience. This helps ensure the presentation is not misleading by overstating what an investor might take home.
A common pushback is: “But the highest fee isn’t relevant to this type of investor.” And that may be true. In those cases, firms have a few defensible options:
- Create separate versions of the presentation tailored to different investor types, or
- Present multiple fee tiers within the same document, clearly explaining what each tier represents
Either approach can work—but only if disclosures are explicit and easy to understand. When multiple fee structures are shown, clarity isn’t optional; it’s essential.
In practice, many firms maintain separate retail and institutional versions of factsheets or pitchbooks. That approach is perfectly reasonable, but it comes with operational risk. If this becomes standard practice, firms need strong internal controls to ensure the right presentation reaches the right audience. That means:
- Clear internal policies
- Consistent naming and version control
- Training marketing and sales teams on when each version may be used
This often involves an overlap of both marketing and compliance to get it right because getting the fee right is only part of the equation. Making sure the presentation is used appropriately is just as important to ensuring net performance remains meaningful, compliant, and credible.
Which Statistics Can Be Shown Gross-of-Fees?
Since the introduction of the SEC Marketing Rule, there has been significant debate about whether all statistics must be presented net-of-fees—or whether certain metrics can still be shown gross-of-fees. Helpful clarity arrived in an SEC FAQ released on March 19, 2025, which confirmed that not all portfolio characteristics need to be presented net-of-fees. The examples cited included risk statistics such as the Sharpe and Sortino ratios, attribution results, and similar metrics that are often calculated gross-of-fees to avoid the “noise” introduced by fee deductions.
The staff acknowledged that presenting some of these characteristics net-of-fees may be impractical or even misleading. As long as firms prominently present the portfolio’s total gross and net performance incompliance with the rule (i.e., prescribed time periods 1, 5, 10 years),clearly label these characteristics as gross, and explain how they are calculated, the SEC indicated it would generally not recommend enforcement action.
Bringing it all Together
On paper, presenting net and gross performance should be a straight forward exercise.
In reality, layers of regulation, evolving expectations, and heightened scrutiny have made it feel far more complicated than it needs to be. But complexity doesn’t have to lead to confusion.
When firms are clear about:
- Who they are communicating with,
- What that audience expects,
- What the performance is intended to represent, and
- Why certain assumptions were chosen
…the decisions around what gets presented become far more manageable.
Net returns aren’t about finding a single “correct” number. They’re about telling an honest, well-documented story. And when that story is clear, investors don’t just understand the performance—they trust it.
[1] 2020 GIPS® Standards for Firms, Section 2: Input Data and Calculation Methodology(gross-of-fees returns and treatment of transaction costs, including bundled fees).
[2] See SEC Marketing Rule 2 026(4)-1(a) footnote 590 as well as the SEC updated FAQ from January 15, 2026. Available at: https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/marketing-compliance-frequently-asked-questions
In most investment firms, performance calculation is treated like a math problem: get the numbers right, double-check the formulas, and move on. And to be clear—that part matters. A lot.
But here’s the truth many firms eventually discover: perfectly calculated performance can still be poorly communicated.
And when that happens, clients don’t gain confidence. Consultants don’t “get” the strategy. Prospects walk away unconvinced. Not because the returns were wrong—but because the story was missing.
Calculation Is Technical. Communication Is Human.
Performance calculation is about precision. Performance communication is about understanding.
The two overlap, but they are not the same skill set.
You can calculate a composite’s time-weighted return flawlessly, in line with the Global Investment Performance Standards (GIPS®), using best-in-class methodologies. Yet if the only thing your audience walks away with is “we beat the benchmark,” you’ve left most of the value on the table.
This gap shows up all the time:
- A client sees strong long-term returns but fixates on one bad quarter.
- A consultant compares two managers with similar returns and can’t tell what truly differentiates them.
- A prospect asks, “But how did you generate these results?”—and the answer is a wall of statistics.
The math is necessary. It’s just not sufficient.
Returns Answer What. Clients Care About Why.
Returns tell us what happened. Clients want to know why it happened—and whether it’s likely to happen again.
That’s where communication comes in. Good performance communication connects returns to:
- The investment philosophy
- The decision-making process
- The risks taken (and avoided)
- The type of prospect the strategy is designed for
This is exactly why performance evaluation doesn’t stop at returns in the CFA Institute’s CIPM curriculum. Measurement, attribution, and appraisal are distinct steps fora reason—each adds context that raw performance alone cannot provide. Without that context, returns become just numbers on a page.
The Role of Standards: Necessary, Not Narrative
The GIPS Standards exist to ensure performance is fairly represented and fully disclosed. They do an excellent job of standardizing how performance is calculated and what must be presented. But GIPS compliance doesn’t automatically make performance meaningful to the reader.
A GIPS Report answers questions like:
- What was the annual return of the composite?
- What was the annual return of the composite’s benchmark?
- How volatile was the strategy compared to the benchmark?
It does not answer:
- Why did this strategy struggle in down markets?
- What risks did the manager consciously take?
- How should an allocator think about using this strategy in a broader portfolio?
That’s not a flaw in the standards, it’s a reminder that communication sits on top of compliance, not inside it.
Risk Statistics: Where Stories Start (or Die)
One of the most common communication missteps is overloading clients with risk statistics without explaining what they actually mean or how they can be used to assess the active decisions made in your investment process.
Sharpe ratios, capture ratios, alpha, beta—they’re powerful information. But without interpretation, they’re just numbers.
For example:
- A downside capture ratio below 100% isn’t impressive on its own.
- It becomes compelling when you explain how intentionally implemented downside protection was achieved and what trade-offs were accepted in strong up-markets.
This is where performance communication turns data into insight—connecting risk statistics back to portfolio construction and decision-making. Too often, managers select statistics because they look good or because they’ve seen them used elsewhere, rather than because they align with their investment process and demonstrate how their active decisions add value. The most effective communicators use risk statistics intentionally, in the context of what they are trying to deliver to the investor.
We often see firms change the statistics show Your most powerful story may come from when your statistics show you’ve missed the mark. Explaining why and how you are correcting course demonstrates discipline, self-awareness and control.
Know Your Audience Before You Tell the Story
Before you dive into risk statistics, every manager should be asking themselves about their audience. This is where performance communication becomes strategic. Who are you actually talking to? The right performance story depends entirely on your target audience.
Institutional Prospects
Institutional clients and consultants often expect:
- Detailed risk statistics
- Benchmark-relative analysis
- Attribution and metrics that demonstrate consistency
- Clear articulation of where the strategy fits in a portfolio
They want to understand process, discipline, and risk control. Performance data must be presented with precision and context –grounded in methodology, repeatability and portfolio role. Often, GIPS compliance is a must. Speaking their language builds credibility and demonstrates that you respect the rigor of their decision-making process. It shows that you understand how they evaluate managers and that you are prepared to stand behind your process.
Retail or High-Net-Worth Individuals
Many individual investors don’t care about alpha or capture ratios in isolation. What they really want to know is:
- Will this help me retire comfortably?
- Can I afford that second home?
- How confident should I feel during market downturns?
For this audience, the same performance data must be framed differently—around goals, outcomes, and peace of mind. Sharing how you track and report on these goals in your communication goes a long way in building trust. It signals that you are committed to their goals and will hold yourself accountable to them. It reassures them that you are not just managing money, you’re protecting the lifestyle they are building.
Keep in mind that cultural differences also shape expectations. For example, US-based investors are primarily results oriented, while investors in Japan often expect deeper transparency into the process and inputs, wanting to understand and validate how those results were achieved.
Same Numbers. Different Story.
The mistake many firms make is assuming one performance narrative works for everyone. It doesn’t. Effective communication adapts:
- The statistics you emphasize
- The language you use
- The level of detail you provide
- The context you wrap around the results
The goal isn’t to simplify the truth, it’s to translate it to ensure it resonates with the person on the other side of the table.
The Best Performance Reports Tell a Coherent Story
Strong performance communication does three things well:
- It sets expectations
Before showing numbers, it reminds the reader what the strategy is designed to do—and just as importantly, what it’s not designed to do. - It explains outcomes
Attribution, risk metrics, and market context are used selectively to explain results, not overwhelm the reader. - It reinforces discipline
Good communication shows consistency between philosophy, process, and performance—especially during periods of underperformance.
This doesn’t mean dumbing anything down. It means respecting the audience enough to guide them through the data.
Calculation Builds Credibility. Communication Builds Confidence.
Performance calculation earns you a seat at the table.
Performance communication earns trust.
Firms that master both don’t just report results—they help clients understand them, evaluate them, and believe in them.
In an industry where numbers are everywhere, clarity is often the true differentiator.
Key Takeaways from the 29th Annual GIPS® Standards Conference in Phoenix
The 29th Annual Global Investment Performance Standards (GIPS®) Conference was held November 11–12, 2025, at the Sheraton Grand at Wild Horse Pass in Phoenix, Arizona—a beautiful desert resort and an ideal setting for two days of discussions on performance reporting, regulatory expectations, and practical implementation challenges. With no updates released to the GIPS standards this year, much of the content focused on application, interpretation, and the broader reporting and regulatory environment that surrounds the standards.
One of the few topics directly tied to GIPS compliance with a near-term impact relates to OCIO portfolios. Beginning with performance presentations that include periods through December 31, 2025, GIPS compliant firms with OCIO composites must present performance following a newly prescribed, standardized format. We published a high-level overview of these requirements previously.
The conference also covered related topics such as the SEC Marketing Rule, private fund reporting expectations, SEC exam trends, ethical challenges, and methodology consistency. Below are the themes and observations most relevant for firms today.
Are Changes Coming to the GIPS Standards in 2030?
Speakers emphasized that while no new GIPS standards updates were introduced this year, expectations for consistent, well-documented implementation continue to rise. Many attendee questions highlighted that challenges often stem more from inconsistent application or interpretation than from unclear requirements.
Several audience members also asked whether a “GIPS 2030” rewrite might be coming, similar to the major updates in 2010 and 2020. The CFA Institute and GIPS Technical Committee noted that:
· No new version of the standards is currently in development,
· A long-term review cycle is expected in the coming years, and
· A future update is possible later this decade as the committee evaluates whether changes are warranted.
For now, the standards remain stable—giving firms a window to refine methodologies, tighten policies, and align practices across teams.
Performance Methodology Under the SEC Marketing Rule
The Marketing Rule featured prominently again this year, and presenters emphasized a familiar theme: firms must apply performance methodologies consistently when private fund results appear in advertising materials.
Importantly, these expectations do not come from prescriptive formulas within the rule. They stem from:
1. The “fair and balanced” requirement,
2. The Adopting Release, and
3. SEC exam findings that view inconsistent methodology as potentially misleading.
Common issues raised included: presenting investment-level gross IRR alongside fund-level net IRR without explanation, treating subscription line financing differently in gross vs. net IRR, and inconsistently switching methodology across decks, funds, or periods.
To help firms void these pitfalls, speakers highlighted several expectations:
· Clearly identify whether IRR is calculated at the investment level or fund level.
· Use the same level of calculation for both gross and net IRR unless a clear, disclosed rationale exists.
· Apply subscription line impacts consistently across both gross and net.
· Label fund-level gross IRR clearly, if used(including gross returns is optional).
· Ensure net IRR reflects all fees, expenses, and carried interest.
· Disclose any intentional methodological differences clearly and prominently.
· Document methodology choices in policies and apply them consistently across funds.
This remains one of the most frequently cited issues in SEC exam findings for private fund advisers. In short: the SEC does not mandate a specific methodology, but it does expect consistent, well-supported approaches that avoid misleading impressions.
Evolving Expectations in Private Fund Client Reporting
Although no new regulatory requirements were announced, presenters made it clear that limited partners expect more transparency than ever before. The session included an overview of the updated ILPA reporting template along with additional information related to its implementation. Themes included:
· Clearer disclosure of fees and expenses,
· Standardized IRR and MOIC reporting,
· More detail around subscription line usage,
· Attribution and dispersion that are easy to interpret, and
· Alignment with ILPA reporting practices.
These are not formal requirements, but it’s clear the industry is moving toward more standardized and transparent reporting.
Practical Insights from SEC Exams—Including How Firms Should Approach Deficiency Letters
A recurring theme across the SEC exam sessions was the need for stronger alignment between what firms say in their policies and what they do in practice. Trends included:
· More detailed reviews of fee and expense calculations, especially for private funds,
· Larger sample requests for Marketing Rule materials,
· Increased emphasis on substantiation of all claims, and
· Close comparison of written procedures to actual workflows.
A particularly helpful part of the discussion focused on how firms should approach responding to SEC deficiency letters—something many advisers encounter at some point.
Christopher Mulligan, Partner at Weil, Gotshal & Manges LLP, offered a framework that resonated with many attendees. He explained that while the deficiency letter is addressed to the firm by the exam staff, the exam staff is not the primary audience when drafting the response.
The correct priority order is:
1. The SEC Enforcement Division
Enforcement should be able to read your response and quickly understand that: you fully grasp the issue, you have corrected or are correcting it, and nothing in the finding merits escalation.
Your first objective is to eliminate any concern that the issue rises to an enforcement matter.
2. Prospective Clients
Many allocators now request historical deficiency letters and responses during due diligence. The way the response is written—its tone, clarity, and thoroughness—can meaningfully influence how a firm is perceived.
A well-written response shows strong controls and a culture that takes compliance seriously.
3. The SEC Exam Staff
Although examiners issued the letter, they are the third audience. Their primary interest is acknowledgment and a clear explanation of the remediation steps.
Mulligan emphasized that firms often default to writing the response as if exam staff were the only audience. Reframing the response to keep the first two audiences in mind—enforcement and prospective clients—helps ensure the tone, clarity, and level of detail are appropriate and reduces both regulatory and reputational risk.
Final Thoughts
With no changes to the GIPS standards introduced this year, the 2025 conference in Phoenix served as a reminder that the real challenges involve consistency, documentation, and communication. OCIO providers in particular should be preparing for the upcoming effective date, and private fund managers continue to face rising expectations around transparent, well-supported performance reporting.
Across all sessions, a common theme emerged: clear methodology and strong internal processes are becoming just as important as the performance results themselves.
This is exactly where Longs Peak focuses its work. Our team specializes in helping firms document and implement practical, well-controlled investment performance frameworks—from IRR methodologies and composite construction to Marketing Rule compliance, fee and expense controls, and preparing for GIPS standards verification. We take the technical complexity and turn it into clear, operational processes that withstand both client due diligence and regulatory scrutiny.
If you’d like to discuss how we can help strengthen your performance reporting or compliance program, we’d be happy to talk. Contact us.
