Top 5 Risk Statistics to Include in Your Factsheets

Jocelyn Gilligan
CFA, CIPM - Partner
October 4, 2023
15 min
Top 5 Risk Statistics to Include in Your Factsheets

We all know that investing involves a delicate balance of seizing opportunity and managing risk. Even if you do it well, your factsheet may not adequately explain how your strategy manages that balance. Your factsheets tell the story of your performance history and play a crucial role in your sales process by helping prospective investors make informed investment decisions. But how do you know if you’ve included the right information?

Types of Measurements

While every strategy differs in terms of its investment objective, it’s important to identify which types of statistics will be the best at helping you tell the story behind your investment strategy.

Before you choose the exact statistics to include, take a moment to think through what makes your strategy unique and then consider the audience you’re speaking to (sometimes this may mean making more than one factsheet for the same strategy – think retail vs. institutional).

Here are the main categories that should be included…

  • A measure of volatility – to demonstrate stability (or variability) of your strategy
  • Correlation – to express sensitivity to the benchmark or market
  • Risk-adjusted returns – to standardize performance evaluation when considering risk
  • Downside risk – to explain how your strategy performs in down markets
  • Market Capture – to display how the strategy performs during market movements (up or down)

Only you know what makes your strategy unique and appealing to prospective investors, so take the time to determine the key pillars of your strategy and then select statistics that help demonstrate or reinforce that story.

Once that’s clear, it’s time to crunch some numbers.

Top 5 Risk Statistics

Here’s a list of the top 5 risk statistics our experts see included on our clients’ factsheets.

1.  A Measure of Volatility: Standard Deviation

Investment managers have different ways of measuring volatility – often dependent on the strategy employed. Most commonly, we see standard deviation used, which is a measure of total risk (i.e., both systematic and unsystematic risk). Standard deviation quantifies the variability of a strategy’s returns from its average over a specific period. A higher standard deviation indicates greater volatility, implying that the strategy’s returns have experienced significant fluctuations or high variability.

Standard deviation is generally presented for both the strategy and a comparable benchmark. Risk-averse investors are generally looking to invest in strategies that achieve higher returns than the comparable benchmark while having a lower standard deviation than the benchmark over the same period.

Be sure to use this measure to demonstrate the stability of your strategy when it is historically low or to attract those with higher tolerance for fluctuation when it has been historically high. An explanation about how that higher fluctuation translates into outperformance will help paint a more complete picture.

2. Strategy Correlation: Beta

When assessing a new strategy, investors often want to consider how the strategy will fit into their broader portfolio. One way to evaluate this is by considering how sensitive the strategy is to the market (or the total portfolio’s benchmark) using beta. When armed with this information, investors can determine if adding your strategy would increase or decrease their exposure to the pulse of the market. If your strategy intends to offer diversification benefits, beta should be less than one (or negative). If you are adding market exposure, it should be greater than one.

In factsheets, we commonly include beta, calculated against the strategy’s benchmark, to show how the strategy moves relative to its benchmark. This is useful for investors to see if the calculated beta aligns with how an investment manager has described its investment process.

For example, for a strategy described as a “bottom-up approach that holds a concentrated portfolio of the best-performing stocks from a larger universe” (and therefore not directly tied to an index), we would expect beta to be very low (or even negative) or very high, but not close to 1. If it is close to 1, they may be a “closet indexer” that claims to have an in-depth research process, uncorrelated with the market, but in reality, is still basically replicating the benchmark. Investors would want to know this because they can invest in ETFs or funds designed to replicate a benchmark for much lower fees.

Conversely, for a strategy that is described as "enhanced indexing," beta should be close to 1 with returns that outperform the index. In this case, the goal is to track the risk level of the index while beating it performance-wise.

In either case, investors want to see strategy metrics support how your strategy and process is described. If any of these risk measures don’t align, we recommend taking the time to understand and explain why.

3. Risk-Adjusted Returns: Sharpe Ratio

While arguably the most common risk statistic to include, the Sharpe ratio is helpful as a comparison tool because it standardizes performance and risk into one measure.

The Sharpe ratio demonstrates a strategy’s risk-adjusted return by considering its excess return (return above the risk-free rate) per unit of risk taken (standard deviation). A higher Sharpe ratio is preferred. If your strategy claims to offer superior returns with lower risk, the Sharpe ratio is an appropriate measure to demonstrate that.

However, keep in mind that this measure may not be useful for strategies that are not normally distributed (e.g., hedge funds or other strategies with returns that are materially positively skewed when the strategy is successful). For most traditional investment managers, especially those targeting institutional investors, this measure is often expected on a factsheet, so don’t overlook it.

4. Assessing Downside Risk: Maximum Drawdown

Maximum drawdown measures the largest peak-to-trough decline in a strategy’s performance over a specific period. This metric is crucial because it quantifies the potential loss an investor could have experienced during the strategy’s worst-performing period. A larger maximum drawdown implies higher downside risk.

This measure is often good to show along with the max drawdown of the market or benchmark for comparison. While higher potential returns often correlate with greater downside risk, investors, equipped with this information, can determine their tolerance for this kind of loss. In addition, they can use it to compare to other similar strategies they are considering.

If your strategy claims to manage downside risk, maximum drawdown is arguably the best measure to demonstrate tactful management during down markets.

5. Market Capture: Upside/Downside Capture

These measures assess how well a strategy or portfolio performs during market movements, specifically in comparison to a benchmark. Upside capture measures the degree to which a strategy captures the positive returns of a benchmark during periods of market growth. Downside capture measures the degree to which a strategy is exposed to losses when the benchmark declines.

These capture ratios can be used to explain how a strategy aims to achieve specific goals related to market conditions. For example, “beats the market on the upside and protects on the downside” (you’d hope to see over 100% upside capture with less than 100% downside capture) or “capital preservation with risk targets below the overall market” (you’d expect to see lower than 100% upside capture with hopefully a very low downside capture).

Please note that it is most common to show these measures together (or to show total capture ratio that combines the two). Considering the “fair and balanced” requirements in the SEC marketing rule, it’s likely prudent to include both to explain the full picture.

For an aggressive strategy that is over 100% capture both on the upside and the downside or a capital preservation strategy that is under 100% both on the upside and downside, you ideally can still show that the total capture ratio is greater than 1. This demonstrates that the strategy is winning on the upside by a greater amount than it is losing on the downside or that protection on the downside more than offsets the lagging performance on the upside.

Conclusion

When it comes to investing, knowledge is power. Factsheets provide investors with valuable information to help them make informed decisions about your firm and strategies. When you provide them with a full picture of your performance that includes risk, they are more fully equipped to consider you for further due diligence.

Investment firms that understand these statistics and use them to help explain the story of their investment performance provide context and transparency in a saturated landscape of investment options.

Make sure to take the time to understand what these measures say about your performance each period and include that in some form of market commentary when you share your factsheets with prospects. This demonstrates how informed you are about the strategies you manage, how decisions made impact results, and what your plans are to address them.

Want to discuss how you can improve your factsheets with risk statistics? Schedule a free 30-minute brainstorm with one of our partners on which statistics you should include to help explain your investment performance.

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Longs Peak is pleased to announce that Partner and Co-Founder, Jocelyn Gilligan has been named a GenXYZ Top Young Professional by ColoradoBiz Magazine. As ColoradoBiz states, “They’re uncommon achievers, whether as entrepreneurs, CEOs, nonprofit leaders, visionaries critical to their companies’ success or, in some cases, all of those roles. This year’s Top 25 Young Professionals figure to continue making a difference professionally and in their communities for years to come.”
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Longs Peak is pleased to announce that Partner and Co-Founder, Jocelyn Gilligan has been named a GenXYZ Top Young Professional by ColoradoBiz Magazine.

As ColoradoBiz states, “They’re uncommon achievers, whether as entrepreneurs, CEOs, nonprofit leaders, visionaries critical to their companies’ success or, in some cases, all of those roles. This year’s Top 25 Young Professionals figure to continue making a difference professionally and in their communities for years to come.”

Jocelyn grew up in Boulder, CO and graduated from the University of Colorado. She started her career at Ernst & Young in New York City where she worked on their Financial Services Transfer Pricing Team. She transferred with EY to their office in Shanghai and then eventually to Hong Kong. Jocelyn left EY as a Manager and relocated back to Colorado where she and her husband started a family. Soon thereafter, Jocelyn and Sean founded Longs Peak out of a small one-car garage in their home in Longmont, CO. Now running a thriving team of 14, Jocelyn has weathered the ups and downs of entrepreneurship. She credits a lot of their success to their amazing team and the community of entrepreneurs they live near and network with (Longs Peak is an active member of EO (Entrepreneurs Organization)).

Jocelyn is a voting member of the PTO at her children’s school and a member of Women in Investment Performance Measurement, a group recently founded to support women in the investment performance industry.

Please join us in celebrating this year’s ColoradoBiz Top Young Professionals nominees. You can view the complete list of nominees here

About ColoradoBiz’s Top 25 Young Professionals

The 13th annual Gen XYZ awards is open to those under 40 who live and work in Colorado — numbered in the hundreds, making for difficult decisions and conversations among judges, as always. Applications were judged by our editorial board based on career achievement, community engagement and their stories of how they got to where they are now.

About Longs Peak

Longs Peak is a purpose and values-driven company. It is our mission to make investment performance information more transparent and reliable—empowering investors to make better, more informed investment decisions.

At the onset, we were looking to help smaller investment managers by giving them access to professional performance experts and tools typically only available to very large firms. We know that our work enables emerging managers to compete with the big guys and helps facilitate their growth. We strive to be our clients’ most valued outsource partner and to be known for our exceptional client service. We know that providing exceptional client service means that we must first create a culture that lives by the ideals we are trying to create for our clients. A place where incredibly talented individuals are empowered to put their best work into the hands of clients that truly value what we do. As a firm, we recognize that our greatest asset is people – both those we work with and those we work for. We continue to evolve into something that represents the needs of both of these groups and hope someday a GIPS Report is provided to every prospective investor in the world.

SEC Clarifies Marketing Rule: Gross-of-Fee Returns Allowed Under Certain Conditions
The investment management industry has spent significant time grappling with the SEC’s Marketing Rule and the question of whether gross-of-fee returns can be presented without corresponding net-of-fee returns in certain cases. Many firms have invested resources in trying to allocate fees to individual securities and sectors in an effort to comply. However, the SEC has now issued two FAQs (March 19, 2025) that provide much appreciated clarity on extracted performance and portfolio characteristics. The key takeaway? It is possible to present gross-of-fee returns without net-of-fee returns—if certain conditions are met.
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The investment management industry has spent significant time grappling with the SEC’s Marketing Rule and the question of whether gross-of-fee returns can be presented without corresponding net-of-fee returns in certain cases. Many firms have invested resources in trying to allocate fees to individual securities and sectors in an effort to comply. However, the SEC has now issued two FAQs (March 19, 2025) that provide much appreciated clarity on extracted performance and portfolio characteristics. The key takeaway? It is possible to present gross-of-fee returns without net-of-fee returns—if certain conditions are met.

Extracted Performance: Gross Returns Can Stand Alone Under Specific Criteria

Investment advisers often present the performance of a single investment or a subset of a portfolio (“extracted performance”) in marketing materials. Historically, the SEC required both gross and net performance to be shown for such extracts. The new guidance provides a pathway for firms to display only gross-of-fee extracted performance, provided the following conditions are met:

  1. The extracted performance must be clearly identified as gross performance.
  2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
  3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the extracted performance.
  4. The total portfolio’s performance must be calculated over a period that includes the entire period of the extracted performance.

If these conditions are satisfied, the SEC staff has indicated they will not recommend enforcement action, even if the extracted performance is presented without corresponding net returns. This is a notable shift, as it allows firms to avoid the complex and often impractical task of allocating fees at the investment or sector level.

Portfolio and Investment Characteristics: Net-of-Fee Not Always Required

Another common industry question has been whether certain portfolio or investment characteristics—such as yield, volatility, Sharpe ratio, sector returns, or attribution analysis—constitute “performance” under the marketing rule, and if so, whether they must be presented net of fees.

The SEC’s latest guidance acknowledges that calculating these characteristics net of fees can be difficult and, in some cases, may lead to misleading results. As a result, the staff has confirmed that firms may present gross characteristics alone, without net characteristics, if they meet the following criteria:

  1. The characteristic must be clearly identified as calculated without the deduction of fees and expenses.
  2. The advertisement must also present the total portfolio’s gross and net performance in a manner consistent with SEC requirements.
  3. The total portfolio’s performance must be given at least equal prominence to, and facilitate comparison with, the gross characteristic.
  4. The total portfolio’s performance must be calculated over a period that includes the entire period of the characteristic being presented.

As with extracted performance, these conditions help ensure that the presentation is not misleading, reducing the risk of enforcement action.

Bottom Line: A Practical Path Forward

This updated SEC guidance provides much-needed flexibility for investment managers, allowing for the presentation of gross-of-fee returns in a compliant manner. Firms that clearly disclose their approach and follow the specified conditions can reduce compliance burdens while still meeting investor protection standards. While this does not eliminate all complexities of the Marketing Rule, it does offer a practical solution that allows for more straightforward and meaningful performance reporting.

For firms navigating these changes, ensuring clear disclosures and maintaining compliance with the general prohibitions of the rule remains critical. Those who align their advertising materials with these guidelines can now confidently use gross-of-fee performance in a way that is both transparent and in compliance with regulatory requirements.

Questions?

If you have questions about calculating or presenting investment performance in a manner that complies with regulatory requirements or industry best practices, we would love to talk to you. Please feel free to email us at hello@longspeakadvisory.com.

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The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.
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The Global Investment Performance Standards (GIPS®) have released a new Guidance Statement for OCIO Portfolios, bringing greater transparency and consistency to the way Outsourced Chief Investment Officers (OCIOs) report performance. This update is a significant milestone for firms managing OCIO Portfolios and asset owners looking to evaluate their OCIO providers.

What is an OCIO?

An Outsourced Chief Investment Officer (OCIO) is a third-party fiduciary that provides both strategic investment advice and investment management services to institutional investors such as pension funds, endowments, and foundations. Instead of building an in-house investment team, asset owners delegate investment decisions to an OCIO, which handles everything from strategic planning to portfolio management.

Who Does the New Guidance Apply To?

The Guidance Statement for OCIO Portfolios applies when a firm provides both:

  1. Strategic investment advice, including developing or assessing an asset owner’s strategic asset allocation and investment policy statement.
  2. Investment management services, such as portfolio construction, fund and manager selection, and ongoing management.

This ensures that firms managing OCIO Portfolios follow standardized performance reporting, making it easier for prospective clients to compare OCIO providers.

Who is Exempt from the OCIO Guidance?

The guidance does not apply in the following scenarios:

  • Investment management without strategic advice – If a firm only manages investments without advising on asset allocation or investment policy.
  • Strategic advice without investment management – If a firm provides recommendations but does not manage the portfolio.
  • Partial OCIO portfolios – If a firm only manages a portion of a portfolio, rather than the full OCIO mandate.
  • Retail client portfolios – The guidance is specific to institutional OCIO Portfolios and does not apply to retail investors including larger wealth management portfolios.

Key Change: Required OCIO Composites

Previously, OCIO firms had flexibility in defining their performance composites. Now, the GIPS Standards introduce Required OCIO Composites, which categorize portfolios based on strategic asset allocation.

Types of Required OCIO Composites

  1. Liability-Focused Composites – Designed for portfolios aiming to meet specific liability streams, such as corporate pensions.
  2. Total Return Composites – Focused on capital appreciation, commonly used by endowments and foundations.

Firms must classify OCIO Portfolios based on their strategic allocation, not short-term tactical shifts. This standardization enhances comparability across OCIO providers. The specific allocation ranges for the required composites are as follows:

Required OCIO Composites for OCIO Portfolios

Required OCIO Composites
Source: Guidance Statement for OCIO Portfolios

Performance Calculation & Reporting

To ensure transparency, firms must follow specific rules for return calculations and fee disclosures:

  • Time-weighted returns (TWR) are required, even for portfolios with private equity or real estate holdings.
  • Both gross and net-of-fee returns must be presented to clarify the true cost of OCIO management.
  • Fee schedule disclosures must include all investment management fees, including fees from proprietary funds and third-party placements.

Enhanced Transparency in GIPS Reports

The new guidance also requires OCIO firms to disclose additional portfolio details, such as:

  • Annual asset allocation breakdowns (e.g., growth vs. liability-hedging assets).
  • Private market investment and hedge fund exposures.
  • Portfolio characteristics, such as funding ratios and duration for liability-focused portfolios.

By providing these details, OCIO firms enable prospective clients to make better-informed decisions when selecting an investment partner.

When Do These Changes Take Effect?

The Guidance Statement for OCIO Portfolios is effective December 31, 2025. From this date forward, GIPS Reports for Required OCIO Composites must follow the new standards. However, firms are encouraged to adopt the guidance earlier to improve transparency and reporting consistency.

Why This Matters

With OCIO services growing in popularity, this new guidance ensures that firms adhere to best practices in performance reporting. By establishing clear rules for composite classification, return calculation, and fee disclosure, the guidance empowers asset owners to compare OCIO providers with confidence.

As the December 31, 2025 deadline approaches, OCIO firms should begin aligning their reporting practices with this new guidance to stay ahead of the curve.

Don’t miss CFA Institute’s webinar scheduled for this Thursday February 6, 2025 to hear more on this guidance statement.

Questions?

If you have questions about the Guidance Statement for OCIO Portfolios or the Standards in general, we would love to talk to you. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping firms maintain their compliance with the GIPS Standards on an ongoing basis. Please feel free to email us at hello@longspeakadvisory.com.