The 2020 GIPS Standards: Opening Doors for Alternative Managers
The 2020 edition of the GIPS® standards was released on June 28, 2019. One of the major initiatives of the overhaul was to make compliance with the GIPS standards easier for alternative managers. In the past, it did not make sense for many of these managers to claim GIPS compliance due to the absence of composites at such firms. However, given the lack of standardization of investment performance reporting in the alternative manager universe, and the new, more flexible structure of the GIPS standards, compliance may be an attractive option for firms looking for consistency. Additionally, as investors demand more transparency into investment performance, we see adoption of the GIPS standards as a very real possibility for many alternative managers that may have never considered doing so.
Institutional investors have historically requested that traditional managers claim GIPS compliance, going as far as eliminating potential managers from consideration for failing to do so. We have seen through RFP data recently that this trend is starting to emerge within the alternative investment space as well and should continue with the transition to the 2020 GIPS standards. For example, the 2018 eVestment and ACA survey revealed 75% of consultants expected hedge fund and private equity fund managers would be required to claim compliance with the GIPS standards in the coming years.
How will the 2020 GIPS standards impact alternative managers?
The goal of the GIPS standards is to promote full disclosure and fair representation of performance results in an apples-to-apples format so that prospective investors get a consistent view of performance from one manager to another. The 2020 edition of the GIPS standards should be appealing to alternative investment managers for the following reasons (among others).
Vehicle Based Reporting: The 2020 GIPS standards enable firms to present performance in line with how a strategy is being marketed. For separate account strategies, marketing efforts are composite based, while private funds employ a vehicle-based approach.
Carve-Outs with Allocated Cash: In addition, the 2020 GIPS standards allow for carve-out performance to be utilized as a way to represent a new strategy. This can be a useful tool for firms wishing to create a new fund based off a particular vertical within an existing fund. There are specific rules detailing how this carved-out information must be presented.
- Additional Return Presentation Options: The 2020 GIPS standards allow for the presentation of time-weighted rates of return (TWR) or money-weighted rates of return (MWR, formerly referred to as internal rates of return, IRR) depending on the control of external cash. In particular, the GIPS standards allow for the presentation of MWR if any of the following conditions exist within the investment vehicle: illiquid investments, fixed life, closed end, and/or commitment based.
Alternative investment strategies are seeing record inflows as investors look for higher yields in a low interest rate environment. In turn, there is an increased number of private fund managers and thus, more competition. In seeking a competitive edge, many alternative investment managers will benefit from the enhancements the 2020 GIPS standards provide, leading to increased rates of compliance in the sector.
Get a jump start on how the 2020 GIPS standards may impact your firm during the complimentary webcast "The GIPS Standards: Are You Ready for 2020?" ACA highlights the material changes to the GIPS standards, including how the final version compared to the exposure draft. Watch On Demand.
ACA Performance Services assists many different alternative asset managers in their efforts to claim compliance with the GIPS standards and ultimately become verified. If your firm is looking for more information into this effort, please contact Christie Dillard.
About ACA Performance Services
ACA Performance Services provides GIPS compliance verification and consulting services to investment managers around the globe. Our team — comprised of more than 80 professionals with extensive GIPS standards and performance experience — is the largest group of GIPS compliance professionals in the world solely dedicated to GIPS compliance verification and related services.