When to Use Time-Weighted Return (TWR) vs. Money-Weighted Return (MWR)
Managing Partner
December 29, 2020
15 min
There are two types of returns investment managers use to report the performance of their strategies: Time-Weighted Returns (“TWR”) and Money-Weighted Returns (“MWR”). The most common MWR is the Internal Rate of Return (“IRR”). Here we take a look at both TWR and MWR to help you understand when each method should be used and why.
The key difference between the two methods is that:
- Time-Weighted Returns REMOVE the effect of the timing and amount of external cash flows.
- Money-Weighted Returns INCLUDE the effect of the timing and amount of external cash flows.
Because of this, money-weighted returns represent the actual return received by the investor, while time-weighted returns represent the return achieved by the investment manager after removing the effect of external cash flows.
But when is it appropriate to use one over the other? Because MWRs reflect the investor’s actual returns, it may seem like the best method to use in all situations. However, if the purpose of reviewing the performance is to evaluate the portfolio manager’s discretionary management, we do not want decisions made by the investor to affect the results. The most appropriate methodology to use to evaluate the portfolio manager depends on who controls the external cash flows (contributions and withdrawals) from the portfolio.
Investor-Driven Cash Flows
When the timing and amount of external cash flows are controlled by the investor, investor-driven decisions impact the return. To present returns that allow investors to evaluate a manager’s discretionary management, TWR should be utilized to remove the effect of these investor-driven decisions. Because the effects of cash flows are removed, a TWR doesn’t penalize or benefit a portfolio manager’s performance for contributions or withdrawals that the manager did not control.
Investment Manager-Driven Cash Flows
When the investment manager does have control over the timing and amount of external cash flows (e.g., private equity funds where the investment manager has control over capital calls and distributions), their effects should be included in the evaluation of the manager’s performance. An MWR, which includes the effect of timing and amount of external cash flows, would therefore appropriately penalize or benefit a portfolio manager for contribution and withdrawal decisions that were part of their discretionary management.
External Cash Flow Impact on Returns
Without external cash flows, TWR and MWR are equal. When external cash flows (and volatility) are present, the results will differ.
The following are examples of how the MWR and TWR will differ under different market scenarios:
- If a contribution is made and then the portfolio has subsequent performance that:
- SHIFTS POSITIVELY – MWR > TWR (investor added money just before the upswing)
- SHIFTS NEGATIVELY – TWR > MWR (investor added money just before the decline)
- REMAINS STEADY – TWR = MWR (investor added money during a period without volatility)
- If a distribution is made and then the portfolio has subsequent performance that:
- SHIFTS POSITIVELY – TWR > MWR (investor withdrew money just before the upswing)
- SHIFTS NEGATIVELY – MWR > TWR (investor withdrew money just before the decline)
- REMAINS STEADY – MWR = TWR (investor withdrew money during a period without volatility)
To help visualize how this works, below are three examples. For the sake of simplicity, we assume the portfolio perfectly replicates the index. The line on the graphs demonstrates the index return stream for the performance period while the filled in area represents the amount of capital invested during each segment of the period. Since TWR removes the effect of the external cash flows, the TWR will approximately equal the index return while the MWR will be impacted by the amount of capital invested for each segment of the performance period.
Example 1: A portfolio with a beginning value of $100k has a steady return of 10% without any volatility for the full period (scenarios with and without external cash flows):
TWR = 10% and MWR = 10%
TWR = 10% and MWR = 10%
TWR = 10% and MWR = 10%
The TWR and MWR is equal for all of these scenarios because there is no volatility. With a steady return stream, there is no market timing that would make external cash flows cause a difference between the TWR and MWR.
Example 2: A portfolio with a beginning value of $100k has a 10% increase, but subsequently declines to end the period at the same level at which it began.
TWR = 0% and MWR = 0%
TWR = 0% and MWR = -3.63%
TWR = 0% and MWR = 6.04%
The TWR is 0% for all scenarios because the strategy lost all of its initial gains to end up back at the starting point.
The MWR is negative when adding money at the high point because in this scenario the capital base is smaller while the strategy is performing positively and larger when the strategy is performing negatively.
The MWR is positive when removing money at the high point because in this scenario the capital base is larger while the strategy is performing positively and smaller when the strategy is performing negatively.
Example 3: A portfolio with a beginning value of $100k has a 10% decrease, but subsequently increases to end the period at the same level at which it began.
TWR = 0% and MWR = 0%
TWR = 0% and MWR = 3.71%
TWR = 0% and MWR = -5.91%
The TWR is 0% for all scenarios because the strategy gained back all of its initial losses to end up back at the starting point.
The MWR is positive when adding money at the low point because in this scenario the capital base is smaller while the strategy is performing negatively and larger when the strategy is performing positively.
The MWR is negative when removing money at the high point because in this scenario the capital base is larger while the strategy is performing negatively and smaller when the strategy is performing positively.
Criteria to Determine When MWR is Appropriate
Ultimately, investment managers should be evaluated based on TWR unless specific criteria are met, in which case MWR is more appropriate. The criteria[1] for using MWR includes:
The investment manager has control over the timing and amount of external cash flows and the investment vehicle has at least one of the following characteristics:
- Closed-end
- Fixed life
- Fixed commitment
- Illiquid investments as a significant part of the investment strategy
MWR vs TWR for GIPS
The use of money-weighted returns in GIPS Reports instead of time-weighted returns has broadened under the 2020 edition of the Global Investment Performance Standards (“GIPS”). All firms can show MWRs in addition to TWRs if they wish to do so; however, if a firm wishes to replace its TWR with MWR, the criteria listed in the prior section must be met. For more information on these requirements, please see Question 10 of Longs Peak’s GIPS Compliance FAQs.
For more information on how to present performance information in compliance with the GIPS standards, see our recent article on updating GIPS reports to comply with the 2020 edition of the GIPS standards.
If you have questions about calculating investment performance or GIPS compliance, please contact us or email Sean Gilligan at sean@longspeakadvisory.com.
[1] Global Investment Performance Standards (GIPS®) – For Firms, Fundamentals of GIPS Compliance, Provision 1.A.35, pages 5-6.
Popular Post
The Performance Problems That Cost Managers Allocations
August 23, 2026
15 min
Most managers assume that losing an allocation comes down to returns. Underperform the benchmark, underperform peers, and the mandate goes elsewhere. That happens, but it's not usually the reason a manager gets cut from a search after the numbers already looked competitive.
More often, it's something in how the performance was presented that made an allocator hesitate. A number that didn't match across two documents. A risk statistic nobody could explain. A question in due diligence that the manager couldn't answer cleanly. None of these are calculation errors. They're trust problems, and trust is what allocators are ultimately seeking when they write a check.
Here are the performance problems we see that cost managers allocations most often, and none of them start with the returns themselves.
The Numbers Don't Match Across Documents
An allocator pulls up your factsheet, your pitchbook, and your GIPS® Composite Report, and the composite's five-year return isn't quite the same in all three. Maybe it's a rounding difference, or the factsheet reflects a different "as of" date. The allocator doesn't know that, and they aren't going to assume the best. Inconsistency reads as carelessness, and carelessness in performance reporting raises an obvious question: what else isn't being checked?
This is why we push firms to treat marketing and GIPS compliance as one coordinated process rather than two departments working from different source files. Every document that leaves the building should trace back to the same underlying data.
This matters even more now that due diligence itself is being automated. Operational due diligence teams and consultants are increasingly running AI tools that cross-check pitchbooks, factsheets, DDQs, and regulatory filings against each other, flagging contradictions that used to slip through manual review. A rounding difference or a stale figure that a person might have missed a few years ago is exactly the kind of inconsistency these tools are built to catch instantly. Clean, consistent marketing materials aren't just good practice anymore — they're what it takes to pass a review that may happen before a person ever looks at your numbers.
Performance That Looks Selected, Not Reported
Showing your best-performing account, your best-performing period, or a composite with an unusually small number of accounts invites the question every allocator is trained to ask: what am I not being shown? Due diligence teams know that everyone can't be top quartile. The SEC Marketing Rule's anti-cherry-picking provisions exist because this pattern is common enough that regulators built rules around it, and sophisticated allocators are watching for it. If your performance can be read as overly flattering rather than representative, assume a diligence team will read it that way.
Wanting to lead with your best numbers is an understandable impulse. But diligence teams are trained specifically to spot it, and selective disclosure, even when every number in it is accurate, tends to read as a bigger warning sign than an honest, complete track record would. The stronger story is discipline: the periods where you held to your stated mandate and didn't deviate even while returns lagged. That's a harder story to tell than "we outperformed," but it's the one that actually holds up, because it shows you didn't drift toward whatever was working elsewhere just to keep pace. Chasing returns outside your stated process isn't skill, it's strategy drift, and allocators are trained to spot that just as readily as cherry-picked out performance.
Our advice: resist the instinct to lead with your best examples, and show the scenarios that build trust instead. We recommend showing the ones that demonstrate you stuck to your stated mandate, policies, and procedures, especially when the outcome wasn't your best quarter. Discipline under pressure is a more durable credential than a strong one-off time period, and it's the kind of evidence that holds up long after that number is forgotten.
Statistics You Show But Can't Explain
A page full of risk statistics doesn't build confidence on its own. It invites a follow-up question, and if the manager can't explain what a downside capture ratio of 85% says about the decisions actually made in the portfolio, the statistic becomes a liability instead of an asset. Allocators aren't just checking whether the numbers are favorable. They're checking whether the manager understands their own portfolio well enough to explain it. Statistics presented without interpretation signal that the second answer is “no.”
Likewise, a page of portfolio characteristics that have nothing to do with how the strategy is actually run are not doing you any favors. If you're not making decisions at the sector level, a sector breakdown doesn't tell an allocator anything about your process. If you don't manage individual position sizing, a top-ten holdings list is not adding value.
Your factsheet should be a roadmap for the conversation you want to have, not a checklist of everything other managers include. Every number on it should be something you can explain: how it got there, what decision it reflects, and what it says about how you manage money. A statistic that's only there because everyone else shows it likely isn't helping you if it doesn’t demonstrate active decision making. It's inviting a question you may not have a good answer to.
It's the same logic as a good resume. One padded with every certification, hobby, and unrelated past role doesn't read as impressive, it reads as overwhelming and maybe irrelevant, and it makes the reader work harder to find what actually matters to the job at hand. A factsheet works the same way. The strongest ones include only what's relevant to the case being made and make it easy to connect every line back to it.
No One Can Explain Why a Decision Was Made
This is the one that costs managers the most, and it's rarely about the numbers at all. An allocator asks why a composite was redefined, why a benchmark changed, or why a particular account was excluded, and the answer is a shrug or "that's how we've always done it." Undocumented decisions create the impression that performance is being managed reactively rather than governed intentionally. Firms that can point to a clear, contemporaneous record of why a judgment call was made close that conversation quickly. Firms that can't do this will leave the allocator wondering what other judgment calls haven't been documented either.
The Common Thread
None of these problems are really about whether the strategy performed well. It comes down to whether the story behind the numbers holds up consistently under scrutiny. Allocators aren't just buying returns. They're also buying confidence that what they're being shown today will still be true, and still explainable, a year from now.
The fix isn't more disclosure for its own sake. It's making sure everything across your performance reporting tells the same, well-documented story before an allocator ever has the chance to ask why it doesn't.
GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
PMAR 2026: A Few Takeaways That Stuck With Me
June 1, 2026
15 min
Every Spring, the performance measurement community gathers for PMAR: The Performance Measurement, Attribution & Risk Conference, hosted by TSG. This year marked the twenty-fourth annual, and I left thinking about it differently than I have in years past.
Most years, the themes evolve gradually. This year, I felt like the ground was moving.
The theme nobody put on the agenda but ran underneath nearly every session was the pace of change. Specifically, what artificial intelligence is about to do to our work. And while I came away energized, I also came away with a healthy dose of " we (as in everyone) are not ready for how fast this is coming."
Here's what stayed with me.
AI Was the Undercurrent of the Whole Event
The session titled "AI, Anxiety, and Opportunity: What Performance Professionals Need to Know" was, predictably, one of the most sought-after sessions of the conference. The panel, which included practitioners from across the industry, did a nice job naming both sides of the coin: the anxiety of not knowing what your job looks like in five years, and the opportunity sitting right in front of us if we lean in.
Here's my honest read of the room, though. The mood was optimistic. Maybe a little too optimistic. There was a comfortable assumption that AI will mostly handle the tedious parts and leave the interesting work to us. Or that AI won’t take your job, someone that knows AI will. I'm not sure it'll be that tidy.
From what we're already seeing in our own work and across the firms we serve, the capabilities are advancing faster than most people can comprehend. The days where “our industry is just slower to adapt” are gone. Just last week, anthropic released Fable 5 and before it was shut down (temporarily?), we played around with it a little and its capabilities are dumbfounding. I don't think it will be long before these conferences look drastically different. Different sessions, different vendors, maybe a different sense of what the job even is. That's not a doom prediction. It's just a reason to pay closer attention than feels comfortable.
Separating Skill From Luck Just Got Harder and More Important
One of my favorite sessions was Michael Ervolini's "You Can't Find Skill in Returns: Distinguishing Performance From the Decisions That Generate Them." It's a deceptively simple premise: returns tell you what happened, not whether the manager was actually good. A great number can come from a great decision, or from luck. A bad number can hide genuine skill.
What I appreciate about PMAR is that the community keeps bringing fresh perspectives to this old, hard problem: how do we actually evaluate skill versus luck? It's a question that never fully resolves, and every year someone pushes the thinking forward.
It struck me that this question gets more important in an AI world, not less. As machines take over more of the calculation and even some of the decision-making, our value shifts toward judgment – knowing which decisions deserved credit, which results were noise, and what a number actually means in context. That's the kind of discernment a model can assist with but can't own. For more from Mr. Ervolini, here's a link to his latest book Skill vs. Luck.
The GIPS Challenges That Keep Coming Back
I'm biased here, but the "Common GIPS Challenges and How to Avoid Them" session was a highlight for us, in part because our own Matthew Deatherage, CFA, CIPM, was on the panel alongside peers from TSG, MassPRIM, and Strategic Investment Group.
What I always find striking about this topic is how consistent the challenges are. Firms pursuing compliance with the Global Investment Performance Standards (GIPS®)* tend to stumble on the same handful of issues year after year, and almost all of them are avoidable with the right foundation in place. That's a big part of why we do what we do at Longs Peak: helping firms get ahead of those pitfalls instead of discovering them during verification or, worse, during a regulatory exam.
Matt is a familiar face on these panels, and it's great to have our perspective in the mix. But the takeaway that stuck with me tied right back to the AI thread running through the whole conference.
Across several different panels, presenters talked about feeding the GIPS standards into their own AI models to churn out GIPS reports. And here's the thing, anyone can do that. You can drop the standards into a model in minutes. What a model can't do is provide critical judgment about how a principles-based framework should be applied to your specific facts and circumstances and whether those GIPS reports and statistics were calculated correctly. The GIPS standards aren't a checklist; they're a set of principles that require interpretation, and interpretation is exactly where experience earns its keep.
I'm not saying don't use AI to help build a framework. Use it. But like any model, if you don't really know what you're asking it to do, the output won't save you. Simply asking a model to "make my firm GIPS compliant" isn't going to make it so. At least not yet!
And there's one problem every performance professional already knows AI hasn't solved: data. As they say, garbage in, garbage out. Meaningful performance lives and dies on clean, well-organized data, and no software tool or AI model fixes messy inputs alone. At Longs Peak, we have spent the last 10 years working with clients to improve data quality through data integrity testing. For us, these AI models have only expanded what’s possible. We know one thing for sure: setting these tools up with the proper context (i.e., knowing what to look for) and then evaluating that context on an ongoing basis may turn out to be the most crucial piece of it all.
CFA Institute Is Listening on the CIPM
A session I didn't expect to find as interesting as I did was "CIPM Through the Practitioner Lens," facilitated by Rob Langrick of CFA Institute. Rather than simply presenting at the room, CFA Institute came to listen and gather candid feedback on the CIPM designation: where it's delivering value, where it's falling short, and how it should evolve to stay relevant to the work we actually do day to day.
The audience didn't hold back, and there were some genuinely thoughtful suggestions including how the code of ethics will evolve in this new AI era, some recommendations on reformatting the exam to break it into smaller chunks (going into greater detail on each) as well as adding a CIPM group within the CFA societies to encourage further connection. It was refreshing to see CFA Institute putting real energy behind a credential that so many of us have invested in and want to see grow in value. Given the pace of change in our field, willingness to adapt feels necessary. For anyone interested in contributing ideas to the CIPM, you can use this link to provide feedback.
A Quick Word on the Trivia
I'd be remiss not to mention that Performance Trivia got a much-needed upgrade this year. In past years, only a handful of contestants got to play while the rest of us watched (though in fairness, not all of us were clamoring for the spotlight). The new format this time allowed everyone to participate (without taking center stage), and it was a lot more fun for it. A small change, but it captured something I value about this community: it's competitive, but it's also genuinely collegial and prides itself on memorizing quirky names and vintage formulas.
Before PMAR Even Started: Women in Performance Measurement
For me, the week actually started the day before the conference, at the Women in Performance Measurement (WiPM) gathering. An event created just for the women in our industry. It's one of my favorite parts of this trip every year, and not only because the conversation is good. There's something energizing about being in a room full of women who do this work, comparing notes and reconnecting.
Fittingly, AI came up here too, though in a much more hands-on way than it would on the main stage. Practitioners shared real use cases, both personal and professional: the small ways AI is already saving them time day to day, and the bigger experiments they're running at their firms. It was practical, curious, and refreshingly free of hype.
We were also lucky to have a guest speaker, Lidia Arshavsky, who spoke on executive presence. She broke down how executive presence actually gets evaluated inside organizations (the signals people pick up on, often without realizing it) and offered practical recommendations for strengthening your own. It was the kind of talk that's useful no matter where you are in your career.
It was a great way to kick off PMAR, and an even better way to reconnect with women I only get to see a few times a year. Sometimes the most valuable part of a conference happens in these opportunities to network and reconnect within our niche performance community. A big thank you to TSG who donated the space for this event to take place and have done so for many years.
What AI Can't Take From Us
The conference's forward-looking sessions, including "Innovative Ways to Present Performance: Dashboards & Analytics," got me thinking. The tools are evolving so quickly and so much of the analysis, presentation, and reporting can now be automated. I am left wondering how long the traditional use of software in our space will last in its current form.
When the capabilities advancing fastest don’t always come from the established vendors, who benefits? My hope is that everyone does. That these tools level a playing field that used to tilt heavily toward the largest institutions, give smaller firms the ability to deliver high-caliber analytics previously out of reach, and push the whole field toward better solutions. That makes for a more competitive space and ultimately a clearer picture for investors to evaluate their options.
That's the optimistic case, and I believe it. But it only holds if we stay clear-eyed about where our own value comes from and that's the note I want to leave you on. The pace of change is a reason to focus, not to panic. The things that make us valuable are the things AI can't take: consciousness, judgment, and the human-in-the-loop accountability that clients ultimately trust. Machines will calculate faster and present prettier. They won't sit across the table from a client and take responsibility for what a number actually means.
So, by all means, get curious about the tools (Claude seemed to be most people’s favorite – mine as well). Experiment. Don't be the individual or firm that gets left behind. But anchor yourself in the part of this work that's irreplaceably human, because that's the part that was always the point.
See you at PMAR 2027. I suspect it'll look a little different.
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GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
Understanding Tracking Error & R-Squared
March 27, 2026
15 min
Understanding Tracking Error & R-Squared
When evaluating the performance of an investment portfolio, it's essential to consider metrics that help measure the portfolio's consistency and alignment with its benchmark. Two critical metrics in this context are Tracking Error and R-Squared. These metrics provide insights into the portfolio's performance and risk characteristics. Let's explore what these metrics mean, how they are calculated, and their significance.
What is Tracking Error?
Tracking Error measures the deviation of a portfolio's returns from its benchmark returns. It indicates how closely a portfolio follows the benchmark to which it is compared. A lower tracking error suggests that the portfolio's returns are closely aligned with the benchmark, while a higher tracking error indicates greater deviation.
Tracking Error Formula
Tracking Error= standard deviation of (P-B)
where:
- P = Portfolio return
- B = Benchmark return
Annualized Tracking Error
When using monthly data, tracking error is annualized by multiplying the result by the square root of 12.
What is a Good Tracking Error?
A "good" tracking error depends on the investment strategy. For passive funds that aim to replicate a benchmark, a lower tracking error is desirable. For active funds that seek to outperform the benchmark, a higher tracking error might be acceptable, reflecting the manager's active bets.
What is R-Squared?
R-Squared (R²) measures the proportion of the portfolio's movements that can be explained by movements in its benchmark. It ranges from 0 to 100%, where a higher R-Squared indicates a greater correlation between the portfolio and its benchmark.
R-Squared Formula
R² = (Correlation of portfolio and benchmark returns)²
What is a Good R-Squared?
A higher R-Squared (closer to 100%) indicates that the portfolio's returns are highly correlated with the benchmark. For passive funds, a high R-Squared is preferred. For active funds, a lower R-Squared might indicate that the manager is taking independent positions relative to the benchmark.
How to Interpret Tracking Error and R-Squared
- Tracking Error: Indicates the consistency of the portfolio's returns relative to the benchmark. A lower tracking error is desirable for passive strategies, while active strategies might tolerate higher tracking errors.
- R-Squared: Shows the degree of correlation between the portfolio and benchmark returns. A high R-Squared suggests strong alignment, suitable for passive strategies, while a lower R-Squared might indicate active management.
While both Tracking Error and R-Squared are good measures to understand how closely a track record is managed to a benchmark, they should be analyzed with other available performance metrics. A high or low Tracking Error and R-Squared does not indicate if the performance was good or not. Therefore, using Tracking Error in combination with other metrics like Alpha or the Sharpe Ratio can help provide additional information on whether the strategy performed well while analyzing how closely it was managed to a benchmark. Any selected performance metric should also cover the same time periods as the calculated Tracking Error and R-Squared for the most relevant comparison.
Why are Tracking Error and R-Squared Important?
Both metrics are crucial for assessing portfolio performance and understanding the risk-return profile. They help investors gauge how well a portfolio is managed relative to its benchmark and assess the effectiveness of active versus passive management strategies.
Conclusion
Tracking Error and R-Squared are essential tools for evaluating portfolio performance. Understanding these metrics can help investors make informed decisions about their investment strategies and better manage their portfolios.
For more information on performance metrics and investment strategies, feel free to contact us or explore our other resources on investment performance.
A Practical Guide to Net vs. Gross Performance
February 1, 2026
15 min
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
Why Calculating Performance Isn’t the Same as Communicating It
January 20, 2026
15 min
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.
Recommended Post
If AI does much of the performance work that taught us,what will teach the next generation of performance experts?
I recently sat in on a webinar with Hope Morrissey of BigPi on building AI tools inside a firm. It was practical and timely: at Longs Peak, we are building out our own workbench, and much of the conversation mapped onto choices we are making right now.
But the question I asked at the end wasn't about tooling. It was about people.
Most of us learned this profession by doing grunt work. We linked monthly returns by hand in Excel. We built and rebuilt composites line by line. We chased a 3 bp difference for an afternoon and found a fee posted to the wrong month. We made mistakes, and someone more experienced caught them and explained why.
That work is going away, and maybe it should. AI and automation increasingly handle reconciliation, first-pass review and draft disclosures faster than any analyst. What's left, and what matters most, is judgment and expertise.
Which raises the uncomfortable part: if the work that built today's experts disappears, how do we build tomorrow's?
The grunt work was never really about the math
Looking back, the spreadsheets weren't the lesson. They were the delivery mechanism for three things that nobody taught us directly.
- A feel for what normal looks like. After linking monthly returns for a few months or running VLOOKUPs to map the right data to the right composite, you get to know what a normal month looks like and, perhaps more importantly, when one looks off.
- A map of where things break. Every error made by hand taught us where errors live: the cash flow cutoff, the fee accrual, the stale price, or the account that should have left the composite two months ago.
- Ownership of the number. When you built it yourself, you could defend it. You knew every assumption inside it.
That is the raw material of judgment. AI doesn't remove the need for it. It removes the accidental way we used to acquire it. So, the answer isn't to preserve busywork for its own sake. It's to identify what the grunt work was teaching and teach it on purpose.
Judgment is the new edge
Shortly after the webinar, I came across a LinkedIn post built on comments NVIDIA CEO Jensen Huang made on the podcast A Bit Personal. Huang pushed back on the usual definition of smart: "somebody who's intelligent, solves [technical] problems." His view: "I find that's a commodity." The people he values are technically astute but can also "infer the unspoken" and "see around corners."
That lands hard in performance measurement. For two decades our credibility rested on getting the math right: time-weighted returns, composite construction, dispersion, three-year standard deviation. Systems already do most of that. AI is now taking the rest.
What remains is the judgment call, the “unknowables.” Is this account still discretionary? Does this cash flow policy make sense for how the strategy is actually marketed? Is this benchmark still the right comparison after the strategy drifted (or the benchmark got too concentrated)?
Those questions don't have a formula and often require interpretation rather than automation. They have experience behind them. And that brings us back to the training problem.
Rebuilding the apprenticeship on purpose
Historically, nobody had to think very hard about how someone learned the job. You hired smart people, gave them the work, and the work did the teaching. Judgment showed up eventually, usually starting somewhere around the end of the first year.
That approach falls apart once the work itself is automated. If we want people who can make good calls, we have to create the experiences that used to happen by accident. I don’t think we have this fully figured out, but these are the five things I keep coming back to.
1. Do it by hand once, then let the machine do it
I still think every new analyst should calculate both time-weighted and money-weighted returns by hand, link a quarter of monthly returns, and put together a small composite from scratch, at least once. Nobody is going to do it that way in production. The point is that it's very hard to supervise a process you've never done yourself. If you don't know where a cashflow belongs in the formula, you won't notice when something is in the wrong place.
Once they've done it, have them run the same data through your automation tools and compare. Sometimes the results match. If they don't, working out why (a different day-weighting convention, a fee treated differently, a cash flow on the wrong date) teaches more about how th calculation really works than any training deck I've seen.
2. Make the reviewer the new entry-level job
For most performance teams, the junior job was to produce the number and someone more senior checked it. Now the machine increasingly produces the number, so the junior job becomes checking it. That's a harder place to start, because we're asking people to review work they may not have spent years doing themselves.
One way to close that gap is to build exercises out of past results. Take AI-generated output and plant real errors (built from anonymized or synthetic examples) seen over the years: a mispriced security, a trade booked a day late, a fee posted to the wrong month, an account that should have left the composite and didn't. Ask newer team members to find them before a senior reviewer does. They may not catch everything at first, and that's fine. Talking through what they missed is where the pattern recognition starts to form, much the way it formed when those mistakes were made by doing the work by hand.
3. Write down the instinct before you investigate
Experienced performance professionals can usually tell something is off before they can explain why. Dispersion that jumps dramatically in a calm quarter. An account that is consistently a composite outlier. A composite return that beats every account in it, by a lot. That instinct is valuable, but it isn't always right. Sometimes it's just bias, and the number is actually fine.
A simple habit helps. When something looks wrong, have the analyst write down what they think is going on before they start digging. Once they've found the answer, have them go back and note whether their first read held up. After a few months they should have a real record of where their instincts are reliable and where they aren't. When those notes are tracked and talked through as part of training, senior team members can see how someone reasons, not just whether they got the right answer.
4. Teach people to hear what isn't in the file
Much of our value sits in the gap between the data and what's happening at the firm. An account quietly drops out of a composite and nobody mentions why. Marketing starts promoting a new strategy before anyone has asked whether it needs its own composite. A portfolio manager mentions "a bit of a style tilt" in passing on a call. None of that is in the file, and AI can only work from the context we provide. If no one recognize what matters and brings it to the table, the tool will never know it was there.
That kind of listening is not new, but it is hard to teach in a classroom. The best way I know is to bring junior team members into the rooms where it happens, early, even if they don't say a word. On an in-house performance team, that might be the monthly attribution review with the portfolio managers, the product committee when a new strategy is on the table, or the kickoff call with your verifier. On our side as consultants, it's client calls and verification kickoffs. In-house teams actually have an advantage here because they sit down the hall from PMs, operations and compliance, and an informal conversation is often where changes show up. Encourage juniors to participate in those conversations instead of working only from the data feed.
Either way, debrief afterward. Ask what they heard that wasn't in the data, and what they would follow up on. The first few answers maybe thin, so share what you heard. Over time they'll pick up on things they used to overlook. That's probably one of the clearest signs that someone is developing real judgment.
5. Turn your own history into the curriculum
Our best training material is our own history of judgment calls. Build a library of real cases (anonymized of course): the facts, what was decided, why, and what you'd do differently now. Include the ones you got wrong.
Run "what could go wrong" exercises together to pass judgment along. Before a verification, exam, or new factsheet goes out, get the team together and ask: "It's six months from now and this went badly. What happened?" Have everyone write their answers down before anyone shares. Newer staff hear what experienced people worry about and why: an undocumented policy change, hypothetical performance shown without the required policies, a net-of-fee calculation that doesn't tie to the fee schedule. That's knowledge that usually takes years to pick up by accident.
What this asks of leaders
This isn't only a training problem. It's a leadership choice about where the time AI saves actually goes.
- Reinvest the hours. If automation saves a senior reviewer ten hours a month, some of those hours belong to teaching. Otherwise, efficiency quietly eats the pipeline of future experts.
- Hire for judgment. Give candidates a messy composite file and ask what worries them, rather than screening on credentials alone.
- Build tools that explain, not just answer. As we build our workbench at Longs Peak, one question I keep asking is whether our tools show its reasoning. A tool that explains why it flagged an account teaches. A tool that just flags it doesn't.
- Measure what matters. Performance teams measure investment results for a living, yet rarely measure their own judgment. Whether you sit inside an investment firm or advise one, track the issues your team caught before the verifier, auditor, compliance or a regulator did, and who caught them. Over time, that tells you more about how your people are developing than how quickly the reports go out.
The experts of the future won't learn the way we did
That's not a loss if we're deliberate about it. The firms that get this right will use AI to move people faster from producing numbers to questioning them, and they'll treat that shift as a training design problem, not a happy accident.
I don't think anyone has fully solved this yet. We’re trying to be intentional about our future pipeline. I'd like to hear how other performance teams are approaching it. What are you doing to build judgment in people who may never link a return by hand?
And as always, reach out if you want help rethinking how your team builds judgment in performance measurement at hello@longspeakadvisory.com.
Sources
- Jensen Huang quotes as reported by Upworthy (Feb 3, 2026), from his appearance on A Bit Personal with Jodi Shelton.
Every so often we hear it: "Oh, you're one of the performance software tools."
It's an understandable assumption. We work in the same world as the software providers: composites, Global Investment Performance Standards (GIPS®), performance data, and the systems that produce all of it. From the outside, it can look like we're all selling the same thing.
We aren't. And if you're deciding how to support your performance and GIPS compliance work, the difference is worth understanding.
The short version: Longs Peak is a team of people who do the work with you, or for you. We're not a platform you log into. Behind the scenes, our tools help our team deliver faster, more consistent service. But no number leaves our hands without a real performance expert standing behind it.
Software Gives You a Capability. Someone Still Has to Run It.
A software provider hands you a tool. A good one can be powerful, and those systems offer a ton of capabilities. But once the tool is installed, the work to run it lands on your desk.
Someone on your team still has to load the data, set up and maintain the composites, review the results, chase down the account that looks off, and know the GIPS standards well enough to make the judgment calls. Software can calculate a return. It can't decide whether a new account belongs in a composite, explain why a number moved, or figure out what to do when a custodian changes its data feed.
What We Actually Do
At Longs Peak, we get our hands dirty, so you don't have to. In practice, that means:
- We manage your composites. Membership decisions, inclusion and exclusion, periodic updates, and the returns that come out the other end. We work alongside members of your team to get those questions answered and make the updates for you. The work gets done by a person who does it every day.
- We act as your GIPS expert. When a new strategy launches, a policy needs revisiting, or a gray area comes up, you have someone who knows the standards and has seen the situation before.
- We dig into your data. We look for outliers, accounts that are breaking composite rules, and other anomalies, before they end up in your reported performance and get caught in verification. Not only do we help identify potential issues, but we work with your team to help create the paper trail to provide an explanation if questioned by a verifier.
- We help with system issues. When your system isn't producing what you need, we get inside it and help work out why.
- We design the output. Once the data work is done, we turn it into beautifully designed, client-ready factsheets and reporting. And we understand this information from a performance, compliance, and design perspective.
- We help you communicate what matters most. For your prospects or a board of directors: which statistics support your story, and which just add noise? Those are communication choices, and we help you make them.
None of this is advice delivered from a distance. We maywork with you as a remote team, but we're not remotely hands-off. We work insideyour data, your systems, and your deadlines, the same way a colleague down thehall would. And when something needs fixing, we roll up our sleeves and fix it,so it’s off your plate and your to-do list.
Ways to Work With Us
Every firm is set up differently, so we don't force a single model.
- Fully outsourced. We run composite management on your behalf, start to finish. For firms without a dedicated performance team, this is often the cleanest answer.
- Part of your team. We work alongside your people, taking on the pieces that are heavy, specialized, or just hard to staff. To your colleagues, we're simply part of the performance team.
- Your GIPS expert on call. Your team runs the day-to-day, and we're there for the questions, reviews, and judgment calls that need someone who has seen it all before.
- Your marketing team. Your data is done and ready to be put to work. We turn it into polished factsheets and reporting for prospects, consultants, and boards, and help you decide which parts of your story deserve the spotlight.
Many clients start in one place and shift as their needs change. That flexibility allows us to grow alongside you and offer as much or little support as you need.
Why This Matters
Most firms don't struggle with GIPS compliance because they misunderstand a requirement. They struggle because the knowledge lives in one person's head, the team is stretched thin, or a system issue has been quietly sitting in the queue for months.
Software doesn't fix any of those problems. People do. Having an experienced team involved reduces key-person risk, frees your own staff for higher-value work, and means fewer surprises when verification or a regulatory review comes around.
A Question Worth Asking
If the person who runs your performance work were out for a month, who would pick it up? And if the honest answer is "we'd figure it out" or you simply don’t have an answer, it may be time to think about who else should be in the room.
We're happy to talk through where you are today and what kind of support would actually help. No software demo required. Email us at hello@longspeakadvisory.com.
GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
If you manage money for institutional clients, you've probably heard some version of this sentence: "We can't consider your strategy unless you're GIPS compliant." For a lot of investment managers, that's the moment the Global Investment Performance Standards (GIPS®) stop being an abstract industry term and start being a business requirement.
This guide covers what GIPS compliance actually is, who needs it, what it takes to get there, and how to keep it running once you do. Wherever a topic deserves a deeper dive, we've linked to the longer article that covers it. Think of this as the map, with the detailed trail guides linked along the way.
What Is GIPS Compliance?
GIPS compliance means a firm calculates and presents its investment performance according to the GIPS which is a set of ethical, standardized rules for performance reporting created and administered by CFA Institute. At their core, the GIPS standards rest on two principles: fair representation and full disclosure.
In practice, that means a GIPS compliant firm can't cherry-pick its best-performing accounts to show a prospect. It has to group similar portfolios into composites, present the full history honestly, disclose the assumptions behind the numbers, and apply the same rules consistently across the entire firm.
GIPS compliance is voluntary. No regulator requires it. But it has become the closest thing the investment industry has to a common language for performance. This is often why so many institutional investors, consultants, and platforms require it before they'll even take a meeting.
Who Needs to Be GIPS Compliant?
Any investment manager who wants to compete for institutional business should take GIPS compliance seriously. That includes:
- RIAs and asset managers pursuing institutional mandates (pensions, endowments, foundations, OCIOs)
- Firms seeking placement on model delivery platforms, SMA platforms, or consultant databases
- Managers responding to RFPs where GIPS compliance is a stated requirement
- Firms that simply want a more defensible, standardized way to calculate and present performance — even without external pressure to do so
According to eVestment, roughly two out of three searches run by institutional investors and consultants in their database exclude firms that aren't GIPS compliant. If your strategy to scale your firm includes institutional or consultant-driven channels, GIPS compliance isn't optional in any practical sense, it's the price of admission.
That said, don't mistake GIPS compliance for a purely institutional tool. Even firms with no institutional ambitions benefit from the discipline it offers: consistent calculation methodologies, documented policies, and a defensible and repeatable process for measuring performance. That rigor tends to pay off internally long before a prospect ever asks for it. And every additional firm that complies strengthens the credibility of the standards industry-wide, which benefits compliant firms and investors alike. The question worth asking isn't whether GIPS compliance is relevant to your business, it's whether now is the right time to embark on the path to become GIPS compliant.
(Note: this guide focuses on investment managers. If you're an asset owner — a pension, endowment, or foundation — evaluating your own internal performance reporting, our asset owner GIPS compliance page covers considerations specific to that role.)
Is GIPS Compliance Required?
No. GIPS compliance is a voluntary standard, not a law or regulation, and the SEC doesn't require it. That part isn't where firms gettripped up.
What's worth understanding is how close many firms already are to GIPS compliance without ever setting out to pursue it. The SEC Marketing Rule requires advertised performance to be fair and balanced, substantiated, and — in most cases — presented net of fees. Those requirements weren't written to mirror the GIPS standards, but in practice they've pushed firms toward much of the same discipline: consistent calculation methodology, defensible net-of-fee treatment, and documentation that can withstand scrutiny.
That means a lot of SEC-registered advisers may already have some of the infrastructure GIPS compliance requires before they've ever considered pursuing it formally. If you're already calculating net returns consistently, applying one methodology across accounts rather than picking whatever looks best, and keeping documentation to back up what you advertise, the remaining work (constructing composites, writing the GIPS standards policies and procedures, and assembling GIPS Reports) is often a smaller lift than firms assume, especially if you hire a consultant like Longs Peak to help!
The frameworks aren't identical, and there are places where they diverge. The GIPS standards permit either gross- or net-of-fee presentation, while the SEC Marketing Rule requires net returns whenever gross is shown; when local law or regulation is stricter than the GIPS standards, firms follow the stricter rule and disclose the deviation. We've written a full breakdown of how that reconciliation works, including sample disclosure language, in Navigating GIPS Compliance When Local Laws Conflict. But those are details to reconcile, not reasons to start from scratch.
How to Become GIPS Compliant: The Building Blocks
GIPS compliance rests on four core components, and implementation generally means building them in this order.
1. Define the firm and scope the universe of portfolios. Compliance is claimed on a firm-wide basis, never at the composite, product, or portfolio level. Before anything else, a firm must define itself: which legal entities, offices, and business lines are included, and how the firm is held out to the public. This sounds simple but is often the most consequential decision in the entire process, especially for firms with multiple brands or affiliated entities. Once that's settled, inventory every account, pooled fund, and mandate that falls within the definition.
2. Build the GIPS standards policies and procedures manual (the "P&P"). This is the operational rulebook: how discretion is defined, how composites are constructed, how cash flows are handled, how errors get corrected. A strong GIPS standards P&P reflects what the firm actually does, not what looks good on paper. Documenting it now, before it's tested by a real-world edge case, saves a lot of pain later.
3. Construct composites and calculate performance. Discretionary portfolios with similar strategies are grouped into composites so performance is presented at the strategy level rather than as a cherry-picked account or model portfolio. Composite construction is typically where firms spend the most time, since it requires historical data review, judgment calls about discretion, and reconciliation across systems. Then asset-weight returns and calculate the required statistics for at least five years of compliant history(or since inception, if younger).
4. Create GIPS Reports and file the compliance notification. The GIPS Report is the compliant, disclosure-rich presentation of a composite's performance that must be given to every prospective client. It includes required statistics, fee treatment, and disclosures that give context to the numbers. Once GIPS Reports are complete, the firm files the GIPS Compliance Notification Form with CFA Institute, a final required step before compliance can be claimed, and one that must be renewed annually.
5. Verification (optional, but a good idea). An independent third party can test whether a firm's policies and procedures are designed appropriately and applied consistently firm-wide. It's not required, but it's widely expected in institutional circles (more on this below).
We've written a full phase-by-phase walk through, including the judgment calls that tend to trip firms up (like defining discretion and handling historical composite membership), in A Practical Framework for Implementing the GIPS Standards.
How long does this take? For most firms with a simple, straight forward structure, implementation can be complete in less than one month. For moderately complex firms or simple firms with longer track records, implementation often runs somewhere between three and six months from kickoff to a completed GIPS Report. Firms with complex legal structures, long historical track records, or messy underlying data should expect it to take longer. The upfront investment in earlier phases (firm definition and policy development) as well as the commitment from your team is what usually determines the timeline.
How much will it cost? One of the questions we hear most often is "what does it cost to become GIPS compliant?" The honest answer is that it depends on a lot of inputs. Two firms of similar size can land in very different places depending on how many composites and accounts they manage, how many years of history must be reconstructed, how complete existing records are, how clean the underlying data is, and how much back-and-forth it takes to resolve open questions along the way. Because of that, we scope every engagement individually rather than pricing it off a flat rate card. The factors below are the ones that most reliably move the estimate up or down. Thinking through them ahead of time makes for a much more productive first conversation.
What tends to drive cost:
Composites and accounts in scope: How many strategies need to be reported on, and how many underlying accounts roll up into them? Being larger doesn’t always mean it will cost more, but we typically find that more accounts or composites often means more work to determine their proper placement.
Years of history involved: Are you reconstructing several years (or since inception) of past performance or are you a brand-new firm just getting started? This becomes a bigger factor the longer the track record (which is often tied to data quality).
Quality of existing records: How complete and well-organized is your historical composite membership documentation? This is often the biggest swing factor. We regularly see firms come in confident that their data is clean, only to find once we're in the weeds that it isn't. Being honest about this up front, even where the answer is "we're not totally sure," helps the entire engagement team start with the same expectations rather than discovering the real scope midstream.
Verification plans: Do you intend to pursue verification alongside (or shortly after) the buildout? This adds coordination and review on top of the compliance work itself.
Existing GIPS compliance experience: Are you starting from a blank page or do you already have some policies, procedures, or a prior composite performance to build on? The more existing foundation you have, the better.
Responsiveness and internal bandwidth: How quickly will your team turn around data requests and answer questions? This affects the timeline most directly, but slow back-and-forth does add real hours too.
We like to meet firms where they are. That might mean managing the full project or helping with the pieces that are most challenging or resource-intensive. We can usually find a way to add value even when a full-scope engagement doesn’t make sense. It’s also worth keeping in mind that some larger providers of managed services have minimum fees or engagement sizes, which may make them less practical depending on your needs and budget. If you’re still unsure if this is the right time, check out our post The Case for Pursuing GIPS Compliance Before You Think you Need It.
Do You Need to Be Verified? No. Verification is voluntary under the GIPS standards. A firm can claim compliance without ever being verified.
That said, verification is generally worth pursuing, particularly for firms competing for institutional mandates where GIPS compliance is treated as table stakes. Verification provides independent assurance that a firm's policies and procedures are designed in line with the GIPS standards and applied consistently — which carries real weight with consultants and prospects performing due diligence. It also tends to create useful internal discipline, since the expectation of independent review keeps processes tighter throughout the year.
If you're earlier in your compliance journey or working within budget constraints, it's reasonable to build a solid compliance foundation first and pursue verification once the timing makes sense. For a detailed walkthrough of what the process actually involves, see our series, How to Survive a GIPS Verification.
GIPS Compliance and the SEC Marketing Rule
For US-registered investment advisers, GIPS compliance doesn't happen in a vacuum — it has to coexist with the SEC Marketing Rule. The two frameworks overlap in some places (both care about fair, substantiated, non-misleading performance) and diverge in others (fee treatment, required disclosures, what counts as an advertisement).
Firms that manage this well tend to build one governance framework that covers both — rather than treating GIPS compliance and marketing rule compliance as separate workstreams run by different teams. We cover what that coordination looks like in practice, including how GIPS Reports, factsheets, and pitchbooks should stay consistent with each other, in What Good GIPS Compliance Governance Looks Like in Practice.
Common Mistakes Investment Managers Make
After helping firms through this process for over a decade, the same handful of issues come up again and again:
- Treating GIPS compliance as a one-time project. Compliance is a firm-wide standard maintained continuously — not a binder that gets built once and shelved.
- A "department of one." When all GIPS compliance knowledge lives with a single person, the firm is one departure away from a serious continuity problem.
- Policies that don't reflect reality. A GIPS standards P&P that describes an idealized process — rather than what the firm actually does — creates real exposure during verification or a regulatory exam.
- Weak documentation of judgment calls. Decisions about discretion, composite redefinitions, or benchmark changes need a paper trail, not just an outcome.
- Underestimating the data work. Composite construction is as much a data reconciliation exercise as it is a compliance exercise. Firms that skip a thorough historical review often find problems later — usually during verification, which is the most expensive time to find them.
Maintaining Compliance: It Doesn't End at "Go-Live"
Becoming compliant is a milestone. Staying compliant is the actual job. The most common breakdowns aren't dramatic, they're small process gaps that compound: a portfolio added to a composite late, a significant cashflow handled inconsistently, or a new strategy launched without a composite decision being made.
The firms that stay clean build GIPS compliance into their regular monthly or quarterly performance cycle, assign clear ownership, and review their policies at least annually. We go deeper on what strong day-to-day governance looks like, including how to structure oversight without over-engineering it, in What Good GIPS Compliance Governance Looks Like in Practice.
The Business Case for GIPS Compliance
Compliance work rarely gets exciting attention internally, but the payoff is concrete. Firms that pursue GIPS compliance typically gain:
- Access to platforms, consultant databases, and institutional searches that require it as a baseline
- Credibility with allocators who use GIPS compliance as a proxy for operational rigor
- Consistency across performance, marketing, and compliance teams that often didn't exist before
- A cleaner foundation for scalability, since the process tends to surface and fix data issues before they become bigger problems
We've watched this play out directly with clients expanding into model delivery platforms and formalizing composite reporting for the first time. For real examples of how compliance translated into new business relationships, see From Compliance to Growth: How the GIPS Standards Help Investment Firms Unlock New Opportunities.
Frequently Asked Questions
What is GIPS compliance? GIPS compliance means a firm calculates and presents investment performance according to the Global Investment Performance Standards (GIPS®), a voluntary, globally recognized set of ethical standards administered by CFA Institute.
Is GIPS compliance mandatory in the United States? No. It's voluntary. The SEC does not require GIPS compliance, though many institutional investors, consultants, and platforms require it as a practical condition of doing business.
Who administers the GIPS standards? CFA Institute owns and administers the GIPS standards, including the GIPS Handbook, Guidance Statements, and the Q&A database that firms rely on for interpretive guidance.
How long does it take to become GIPS compliant? Most firms with a straightforward structure can complete implementation in three to six months. Firms with complex legal structures, long track records, or significant data cleanup will typically need more time.
What is a GIPS Report? A GIPS Report is the standardized, disclosure-rich presentation of a composite's or pooled fund's performance that a GIPS compliant firm must provide to every prospective client or investor.
Is verification required? No, verification is optional. However, it's widely viewed as a meaningful credibility signal, particularly for firms pursuing institutional business, and many allocators expect it in practice.
Can smaller firms become GIPS compliant? Yes. Firm size doesn't determine eligibility. Smaller firms often benefit from outsourcing implementation and ongoing maintenance to a consultant rather than building an internal GIPS compliance function from scratch.
Does GIPS compliance replace the need to follow the SEC Marketing Rule? No. They're separate obligations. A firm can be GIPS compliant and still need to independently satisfy SEC Marketing Rule requirements, particularly around net-of-fee presentation and substantiation of claims.
How Longs Peak Helps
Becoming and maintaining GIPS compliance touches every part of a firm: performance, operations, compliance, and marketing. That's a lot to coordinate on top of running the business.
At Longs Peak, we specialize in guiding investment managers through the entire journey. We help write policies and procedures, construct and maintain composites, prepare GIPS Reports, and manage the verification process alongside your chosen verifier. We've helped more than 250 firms and asset owners get there, and we stay with our clients well past go-live to keep compliance running smoothly year after year.
If you're weighing whether GIPS compliance makes sense for your firm, or you're already compliant and want a second set of eyes on how it's being maintained, let's talk.
GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
