May 2008


While some 30 countries have adopted Gips, many believe it does not apply to hedge funds. Lynn Strongin Dodds reports on efforts to amend the guidelines accordingly ...

Against the current background of financial turmoil, it is no wonder that the pressure is mounting for hedge funds to adopt the Global Investment Performance Standards (Gips). It’s not an easy task in an industry that prides itself on opaque and complex strategies. Industry practitioners, such as the Chartered Financial Analyst Institute (CFAI) are on the case, but the wheels are turning very slowly.
Gips is a set of standardised, industry-wide principles that were launched by the CFAI in 1999 and revised two years ago. They enable institutional investors to compare and contrast traditional funds, and while there is no official regulator, they are rigorously enforced by the US Securities and Exchange Commission. There is also a push for the UK Financial Services Authority to embrace the same stance.
Gips has been adopted, though, by the majority of large fund management groups across 
almost 30 countries. Requirements include providing a strict calendar-year track record as well as reporting the average of all funds within a strategy and not just the best performing ones. In addition, managers must reveal the dispersion compared with the average return as well as the benchmark used and its performance.
There is a perception, particularly in Europe, that the Gips standard is not fully applicable to hedge funds as Gips does not contain hedge fund-specific guidance. US investors have been more demanding and there is an understanding that if a hedge fund is not Gips compliant it could dent its business prospects. By contrast, on the other side of the Atlantic, Switzerland is the only country where any substantial progress has been made.

Anthony Howland, co-founder of Performa, a company recently acquired by Statpro which implements Gips systems for fund management firms, notes that Man Group’s RMF as well as Dalton Strategic Partnership have been pioneers but otherwise interest has been limited. “One of the issues with Gips in Europe is that it is optional and unless there is peer and shareholder pressure, these things take time to infiltrate. There is also a lack of understanding of what Gips can do and there is no reason why the standards cannot be applied to hedge funds. I think more education is needed.” 

David Yim, director in KPMG’s financial services advisory practice, says: “There are three key issues that Gips needs to address. The first is valuation. There is an inherent lack of transparency in some of these strategies and the question is how you get an appropriate market value on which to base returns. The second point is the calculation methodology and benchmarks for absolute returns while the third issue deals with the use and disclosure of derivatives. I agree that there needs to be more dialogue between the hedge fund industry and the Gips executive committee about these issues but I think it is moving forward.”

Not surprisingly, the sub-prime crisis has focused the industry’s attention on adopting a single global performance benchmark. Currently, there are several competing sets of standards either on the table or in the pipeline from groups such as the Alternative Investment Management Association, the Managed Funds Association, the United Arab Emirates, Hedge Funds Working Group, CFAI and the US Treasury.

Advocates of Gips believe the standard would be ideal because they already provide the blueprint for disclosure and the reporting of investment performance. There has been separate guidance for other alternative asset classes such as private equity and real estate, and last year, the UK Hedge Fund Working Party singled out Gips as one way that hedge funds could achieve best practice.

Gips already tackles various issues specific to hedge funds such as valuing a portfolio that includes options, margin borrowing, long as well as short futures and a market neutral strategy. As Jonathan Boersma, executive director, Gips, CFAI Centre for Financial Market Integrity, adds, “Gips already addresses about 85% to 90% of the issues of performance but there needs to be standards that address the strategies that hedge funds employ. Our objective is not about creating a separate standard for hedge funds because they are hard to define but to address the particular challenges of hedge funds.”

To this end, The Gips Interpretations Subcommittee formed a dedicated Alternative Working Group, which held its first meeting last December. Consisting of industry practitioners and performance specialists, all issues will be explored and while few expect any concrete answers in the short term, a discussion paper should be ready in the autumn.

© 2008 funds europe