GIPS Conference 2021: Key takeaways
Sean P. Gilligan, CFA, CPA, CIPM
Managing Partner
November 17, 2021
15 min
CFA Institute hosted the 25th annual GIPS Conference October 26th - 27th 2021. Like last year’s conference, viewers tuned in virtually to hear from industry experts on a range of subjects relating to GIPS compliance and investment performance.
The hottest topics of this year’s conference were the newest developments regarding compliance with the 2020 GIPS Standards, the SEC Marketing Rule, ESG reporting, and manager selection and oversight. Below are some key takeaways from this two-day event.
Updated Resources for the 2020 GIPS Standards
The 2020 edition of the GIPS standards was issued June 2019, and compliant firms are required to make any necessary updates before presenting performance for periods including 31 December 2020 in their GIPS Reports.
This year’s conference reminded firms of these updates and discussed implementation challenges. We have shared similar information in previous articles that may help your firm implement the 2020 GIPS standards if not yet fully adopted. For more information check out our previous articles on How to Comply with the 2020 GIPS Standards, How to Update your GIPS Policies & Procedures for GIPS 2020, and How to Update your GIPS Reports for the 2020 GIPS Standards.
CFA Institute has been hard at work updating the resources on their website so that the most relevant guidance is easy to find. This has involved updating or archiving outdated and repetitive documents, with some of this content being incorporated into new Guidance Statements.
Guidance Statements are authoritative guidance on a broad topic. The Guidance Statements on Supplemental Information, Risk, and Overlay were out for comment prior to issuance of the 2020 standards. Concepts from these Guidance Statements were included in the provisions and the Handbook, covering Supplemental Information and Risk sufficiently enough for those Guidance Statements not to be issued. The Guidance Statement on Overlay Strategies is currently being finalized.
Guidance Statements updated or new in 2021 include the updated Benchmark Guidance Statement (effective 1 April 2021) and new Wrap Fee Guidance Statement (Effective 1 October 2021).
Q&As are also authoritative guidance, but on a narrower topic compared to Guidance Statements. There was a lot of re-organization done to the Q&As, with 265 Q&As being archived and 39 updated by CFA Institute. Content from many of the archived Q&As is now incorporated within the Handbook, while other Q&As are no longer applicable under the 2020 Standards.
There were several new Q&As issued addressing 2020 standards topics.
FINRA Regulatory Notice 20-21
This year’s conference also addressed FINRA Regulatory Notice 20-21, guidance from which indicates that firms presenting IRRs in private placements must calculate and present performance in accordance with the methodology outlined in the GIPS standards.
Details on the calculation and presentation requirements for IRRs, as well as additional information on this regulatory notice was outlined in a previous blog released on this topic.
The GIPS standards generally prohibit firms from making statements about calculating returns in compliance with the GIPS standards, as compliance with the GIPS standards is “all or nothing” and firms cannot partially claim compliance.
With that being said, an exemption has been made to allow firms and their agents to make a specific statement regarding the GIPS Standards only in retail communications concerning private placement offerings that are prepared in accordance with FINRA Regulatory Notice 20-21. The following statements can now be used:
For firms that do NOT claim compliance with the GIPS standards:
[Insert firm name] has calculated the since-inception internal rate of return (SI-IRR) and fund metrics using a methodology that is consistent with the calculation requirements of the Global Investment Performance Standards (GIPS®). [Insert firm name] does not claim compliance with the GIPS standards. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote [insert firm name], nor does it warrant the accuracy or quality of the content contained herein.
For firms that claim compliance with the GIPS standards:
[Insert firm name] has calculated the since-inception internal rate of return (SI-IRR) and fund metrics using a methodology that is consistent with the calculation requirements of the Global Investment Performance Standards (GIPS®). [Insert firm name] claims compliance with the GIPS standards. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote [insert firm name], nor does it warrant the accuracy or quality of the content contained herein.
Databases & the GIPS Standards
Investment manager databases are a powerful tool for the collection of standardized data from investment managers, including quantitative and qualitative data on firms and their strategies.
For managers who populate databases, the importance of providing all available information and keeping the monthly and quarterly performance data up-to-date was emphasized, as not doing so increases the likelihood of being filtered out of investors’ searches.
When narrowing down managers/products, some of the main criteria investors and consultants screen by include:
- Risk/return metrics
- Assets under management
- Product-level details such as benchmarks and holdings
- ESG and Diversity & Inclusion information
Longs Peak helps many clients calculate firm and product statistics and updates them in these databases each month. Getting support in this process is a great way to keep these items updated and help your firm avoid being filtered out for dated information.
The conference speakers also emphasized that when populating databases, GIPS compliant firms should treat these communications the same as any other qualified prospective client. Firms complying with the GIPS standards are required to make their best effort to distribute a GIPS Report to all prospective clients. Firms uploading performance to databases need to think of a database as a prospective client and include their GIPS Report.
A firm’s “best effort” in providing a GIPS Report to a database should involve uploading the GIPS Report directly to the database if that option is available. Otherwise, reaching out to your firm’s database contact and providing the GIPS Report via email also checks the box for this requirement.
The 2020 GIPS standards require firms to demonstrate that they’ve met the distribution requirement, thus it’s important to save any relevant emails and document this effort in a distribution log, similar to how it is done for other prospective clients.
ESG Disclosures
Environmental, social, and governance (ESG) refers to the evaluation of a firm’s sustainability and ethical impact of an investment in a business or company. Investors are increasingly using ESG criteria to screen investment products.
Research has shown that ESG considerations can have an impact on risk and return, so paying attention to these structural, long-term trends has become a focus for many firms as well as investors. Investors want transparency around how products are put together, what they do, and how they do it.
Asset management practices vary by firm, so there tends to be an expectation gap about what ESG means to different firms and what their products do. Disclosures around ESG products have tended to be on the lighter side, focusing on ESG as a process and how these considerations are integrated into the investment process and portfolio construction rather than the outcomes of the products and how those are measured.
Managers have opted to keep these disclosures light as to give themselves the opportunity to adjust their products as the market develops. With so many different questions being asked by investors, a need has arisen for standardizing the disclosure requirements for ESG products.
The CFA Institute Global ESG Disclosure Standards for Investment Products was issued 1 November 2021. This is the first global voluntary standard for disclosing how an investment product reflects ESG matters in its objectives, investment strategy, and stewardship activities.
The Handbook, which includes an explanation of the provisions and interpretive guidance, is set to be issued on or before 1 May 2022. Assurance procedures that will enable independent assessment of ESG disclosure statements is also set to be issued by the same date.
SEC Marketing Rule
The SEC Marketing Rule went into effect 4 May 2021, and firms registered with the U.S. Securities and Exchange Commission (SEC) have until 4 November 2022 to comply. As was the case for the 2020 GIPS standards, early adopters must meet all requirements of the new rule and cannot do a partial adoption.
Under the SEC Marketing Rule, GIPS Reports are considered an advertisement rather than a one-on-one presentation because GIPS Reports typically use the same performance table for all recipients and are a standardized marketing document.
Unfortunately, requirements of the SEC Marketing Rule are not all consistent with those of the GIPS Standards. Since SEC registered firms must ensure they are meeting all regulatory requirements that go beyond what GIPS requires, there are some changes firms may need to make once the SEC Marketing Rule is adopted. For example:
Return Stream – Firms must show net-of-fee returns. Net-of-fee returns must be net of advisory fees and custody fees if the adviser is paid for the custodial services (rather than a third-party custodian).
Track Record – Firms must present the 1-, 5-, and 10-year annualized returns in advertisements. If the track record does not go back this long, the annualized since inception return must be shown, in addition to the applicable time periods listed.
- If GIPS Reports are used as a standalone document, these statistics must be added to the GIPS Reports.
- If the GIPS Reports are included in a pitchbook or incorporated into other marketing materials, these statistics can be shown outside of the GIPS Report.
- Firms whose track records go back farther than the periods for which they claim compliance with the GIPS Standards must show these additional periods. For example, if the firm claims compliance with GIPS for the most recent 5 years, but the firm and strategy have existed for 10 years, the 10-year annualized performance must be shown. Since the GIPS standards do not allow firms to link compliant and non-compliant performance periods, if this is presented on the GIPS Report to satisfy this SEC requirement, a disclosure of this conflict must be included. The following is an example of how this disclosure could be written:
- “The inception of the firm’s GIPS compliance is 1/1/2016. Performance is presented with an inception date of 1/1/2011. Although the GIPS standards prohibit linking compliant and non-compliant performance periods, the 10-year annualized return is presented to meet local regulatory requirements set forth by the SEC Marketing Rule.”
Hypothetical Performance – Firms must make a clear differentiation (and have documented Policies & Procedures) on who may receive hypothetical performance in marketing. To receive this type of information, the recipient must be a sophisticated investor, as defined by the firm in their policies and procedures. The presented hypothetical performance must also be deemed relevant to the given recipient’s financial situation. If using hypothetical performance, firms are required to maintain a record of who it was shared with and how they met the qualifications to receive such performance.
Carve-Outs – What the GIPS standards refers to as a “carve-out,” the SEC Marketing Rule refers to as “extracted performance.” The SEC Marketing Rule also considers a composite of extracted performance to be hypothetical. Therefore, the recipients of carve-out composite performance, such as in a carve-out composite’s GIPS Report, must be qualified to receive hypothetical performance as described in the Hypothetical Performance section above.
Non-Fee-Paying Accounts – Firms must apply a model fee to any non-fee-paying accounts within composites if net-of-fee returns are presented using actual fees. Firms that apply model fees (instead of actual) to determine composite-level net-of-fee returns will not need to make any changes. The fee applied to the non-fee-paying accounts should be the highest fee that was charged historically or the highest possible fee the advisor would charge today.
Frequency/Timeliness of Updates – Marketing must be updated as of the latest calendar year-end at a minimum. However, more recent periods (such as YTD) may be required if, for example, a material shift in the performance occurred since the latest calendar year-end. It is generally expected that most firms should be able to update performance through the end of the calendar year within one month after the year ends.
- Not showing more recent, YTD performance could be considered misleading if more timely quarter-end performance is available and/or events have occurred that would have a significant negative effect on the advisor’s performance (think of updating performance to show 1Q20 to show the impact of COVID). It is important to keep in mind that the general focus of the SEC Marketing Rule is to ensure the presentation is “fair and balanced.” Part of ensuring the presentation is fair and balanced would be showing the most recent performance available regardless of whether it is favorable or unfavorable for your firm.
- Future guidance is expected to be issued, as firms have expressed concerns around the difficulty of implementing this.
Portability – Requirements for presenting portable track records are materially the same between the SEC Marketing Rule and the GIPS Standards. However, the Marketing Rule indicates that if the main individual or team responsible for managing the strategy at the prior firm leaves the current firm, then the portable period can no longer be shown.
- During the conference, there was discussion around possibly being able to continue presenting the portable track record of terminated decision-makers if knowledge of implementing the strategy has been sufficiently transferred to an individual or team at the current firm. A reasonable time-period for this transfer of knowledge could not be specified, as it would depend on the complexity of the strategy. For example, a quantitative strategy primarily managed with an algorithm would likely require less time than a more qualitative investment strategy.
- The key point highlighted was that if firms are electing to present portable track records after key individual(s) are no longer with the current firm, it is important to clearly document this knowledge transfer in case presenting the portable track record is questioned by a regulator.
Conclusion
This year’s speakers did a great job of hitting on the most relevant industry topics and providing resources to add clarification regarding the 2020 GIPS standards.
While the past two virtual conferences have each been a success, we are excited about the possibility of the next conference being in person.
If you have any questions about the 2021 GIPS Virtual Conference topics or GIPS and performance in general, please contact us.
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Part 2: Creating GIPS Policies and Procedures
June 22, 2017
15 min
Calculation Methodology, Books & Records, Composite Definitions & Rules, and Error Correction Policies
As discussed in Part 1 of this two part series, GIPS compliant firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow. This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s policies and describe the procedures the firm follows to maintain its compliance.
In Part 1 of this two part series we covered Firm Definition and Definition of Discretion. Now, in Part 2 we will cover calculation methodology, books and records, composite definitions and rules, as well as error correction policies.
https://www.youtube.com/watch?v=UhaTy-4c-EM&feature=emb_logo
Calculation Methodology
While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting portfolios, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P. This section is typically broken down to separately discuss portfolio-level calculation methodology and composite-level calculation methodology.
The main consideration when establishing your firm’s portfolio-level methodology is the treatment of external cash flows. Since the start of 2010, GIPS requires firms to revalue for all “large” cash flows. It is up to your firm to define the term “large,” but it should be defined based on when your firm feels that estimation methods, such as Modified Dietz, lose their accuracy. Most portfolio accounting systems either value portfolios daily (essentially defining “large” as 0%) or value portfolios for all cash flows 10% or greater. Firms without a portfolio accounting system that are calculating their portfolio-level performance more manually (e.g., in Excel) frequently use 20%, but higher than that is less common.
With regard to composite-level performance, the most important information to document is the method used to asset-weight the portfolio returns to get the composite-level performance results. This is typically achieved through one of the following three methods:
- Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value and then sum the portfolios’ weighted returns to get the composite return for the month.
- Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value plus weighted cash flows and then sum the portfolios’ weighted returns to get the composite return for the month.
- Aggregate the underlying data of all portfolios in the composite and then calculate the performance for each month as if all of the aggregated data is for one large portfolio.
This section should also include information regarding how the other required GIPS statistics are calculated, such as dispersion and 3-year annualized ex post standard deviation. Here, it is important to note whether these statistics are calculated based on gross or net-of-fee returns, whether calculated by your portfolio accounting system or outside the system, (e.g., in Excel) and the specific standard deviation formula used to do the calculation (e.g., a population or sample based formula).
Policies Regarding Books and Records
Firms must be able to support all information included in GIPS compliant presentations as well as support that their client assets are real. This section of your GIPS P&P can outline the types of records that are maintained and in what format/location they are stored. Specifically, firms typically outline the types of documents they have (e.g., custodial statements, records maintained within a portfolio accounting system, printed records from a former portfolio accounting system such as holdings reports, transaction summaries, etc.). In this section, it is also important to mention whether files are hardcopy or electronic, whether they are maintained onsite or offsite, and if there is a limit to the amount of time they are saved.
Composite Definitions and Rules
irms must create policies to ensure that portfolios are placed in the appropriate composite for the correct time period. The timing of portfolio movement in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. For example, firms typically either set a policy based on the amount of time passed since discretion was granted or based on when the portfolio becomes “fully invested” – which must be clearly defined.
For example, if based on time, the policy may be written as, “portfolios are included in the composite at the start of the first full month under management.” If based on when the portfolio becomes fully invested, the policy may be written to state, “portfolios are included in the composite at the start of the first full month after the portfolio is at least 90% invested in line with the strategy.” The percentage set can be whatever your firm feels is appropriate, but you want to establish a clear threshold that can be followed. Simply stating “fully invested” is subjective and difficult to follow consistently.
Other rules can also be documented in this section such as minimum asset levels and significant cash flow thresholds, to keep portfolios out of composites during periods where the intended strategy cannot be fully implemented. Minimum asset levels set for GIPS composite purposes are different than minimums your firm may set for marketing purposes. While your firm can state any marketing minimum you wish based on the size portfolios you hope to attract, the minimum set for composite inclusion must be based on the minimum amount needed to fully implement that strategy. For example, even if your firm states that your strategy has a $1M minimum, portfolios accepted below this threshold must still be included in the composite if they can be managed the same as the portfolios over $1M. In this example, if you determine that below $500k you can no longer diversify the same way as you do for your larger portfolios, then $500k would be an appropriate minimum to set for composite inclusion purposes.
A significant cash flow policy can be established if your firm is concerned with very large cash flows moving in or out of a portfolio. Often these cash flows affect the portfolio’s performance and could distort the composite’s statistics. Firms wishing to implement a significant cash flow policy establish a threshold for the size of a cash flow (typically based on the percentage of the portfolio’s beginning of month market value) that would trigger the temporary removal of the portfolio from the composite while trading takes place to accommodate the cash flow.
This “significant” cash flow threshold is different than the “large” cash flow threshold discussed in the calculation methodology section. While the “large” cash flow threshold is set to improve the mathematical accuracy of the performance calculation, the “significant” cash flow threshold is based on the size of a cash flow that disrupts the actual management of the portfolio. Significant cash flows often lead to distorted performance figures that were out of the portfolio manager’s control in terms of timing or amount.
Error Correction Policies
Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material. Defining materiality thresholds can be difficult, but CFA Institute, in conjunction with the United States Investment Performance Committee (USIPC), conducted a GIPS error correction survey seeking information regarding the typical materiality thresholds used by GIPS compliant firms. We recommend reviewing the Executive Summary of this survey’s results to get an idea of the thresholds that have been set by your peers.
Typically, thresholds are set that define the level when an error becomes a material error. Anything above the threshold would require the firm to redistribute an amended GIPS compliant presentation to any prospective client or clients that relied on the erroneous presentation. This amended GIPS compliant presentation would also need to include a disclosure that explains the correction. Anything below the materiality threshold will only trigger a correction for future distributions, but no disclosure or redistribution of previously circulated presentations.
Updates for GIPS 2020
The GIPS standards were updated in 2020. Check out our post How to Update Your GIPS P&P for GIPS 2020 to make sure your P&Ps are consistent with these changes.
Want to Learn More?
If you have any questions about the GIPS Standards, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis.
GIPS Compliance Actions for the New Year 2020
January 9, 2022
15 min
Your firm works hard to comply with the Global Investment Performance Standards (GIPS®) and likely expects the benefits of GIPS to far outweigh any burden associated with maintaining compliance. Most of the policies and procedures your firm set when first becoming compliant will never need to change; however, as both the standards and your firm evolves, it is beneficial to conduct a high-level review of your GIPS compliance each year. This high-level review will help ensure that you continually refine your processes and policies to maximize the benefits of claiming compliance with GIPS year after year.
This year, conducting a review of your firm’s GIPS compliance is especially important because of the 2020 Edition of the GIPS Standards that was published in mid-2019. For information specific to the 2020 changes, please check out 2020 GIPS Standards: Prepare for the Changes.
Even without the release of a new edition of the standards, each year you should conduct a review. In the review, you should first make sure you have the right people involved. One person or department may be responsible for managing the day-to-day tasks that maintain your GIPS compliance; however, high-level oversight from a larger group should take place to help ensure that any decisions made or policies set will integrate well with your firm’s other strategic initiatives. This larger group, often called a GIPS Committee, typically consists of representatives from compliance, marketing, portfolio management, operations/performance, and senior management.
Not everyone on the committee needs to be an expert in the GIPS standards. In fact, many will not be. What they will need is to be available to share their opinions and represent their department’s interests when establishing or changing key policies for your firm. Your GIPS compliance expert/manager can set the agenda for your meeting and can provide any background on the requirements that will be part of the discussion. If you do not have a GIPS expert internally, or need independent advice about your policies and procedures, a GIPS consultant can be hired to help.
High-Level GIPS Topics to Consider Annually
Once you select the right group to represent each major area of your firm, the following high-level questions can help determine if any action is necessary to improve your GIPS compliance this year:
- Have there been any changes to the GIPS standards?
- Have there been any material changes to your firm or strategies?
- Do your composites meaningfully represent your strategies or should their structure and descriptions be reconsidered?
- Are the materiality thresholds stated in your error correction policy appropriate for the type of strategies you manage and are they consistent with the thresholds set by similar firms?
- Are you satisfied with the service received from your GIPS verifier for the fee that is paid?
- Is there any due diligence you need to conduct on your verification firm?
Changes to the GIPS Standards
It is important to consider whether there have been any changes to the GIPS standards since last year that would require your firm to take action. For example, if a new requirement is adopted, you should consider if any changes to your firm’s policies and procedures or GIPS Reports are needed.
Keep in mind that GIPS compliant firms must comply with all requirements of the GIPS standards including any updates that may be published in the form of Guidance Statements, Questions & Answers (Q&As), or other written interpretations.
If your firm is verified or works with a GIPS consultant, these GIPS experts are likely keeping you informed of any changes to the standards. The best way to check for changes yourself is to visit the “Standards & Guidance” section of www.gipsstandards.org. Specifically, you should check the “GIPS Q&A Database” where you can enter the effective date range of the previous year to see every Q&A published during this period. You should also check the “Guidance Statements” section. The guidance statements are organized by year published, so it is easy to see when new statements are added.
With the new 2020 Edition of the GIPS Standards, a review of the changes to determine how they affect your firm is especially important this year. These changes must be fully adopted before presenting returns in your GIPS reports for periods ending on 31 December 2020 or later.
Changes to Your Firm or Strategies
Similar to changes in the standards, it is important to also consider whether any changes to your firm or its strategies would require you to take action. Examples include, material changes in the way a strategy is managed, a new strategy that was launched, an existing strategy that closed, mergers or acquisitions, or anything else that would be considered a material event for your firm.
Even if no changes were made this year, you should still read your entire policies and procedures document at least annually to make sure it adequately and accurately describes the actual practices followed by your firm. Regulators, such as the Securities and Exchange Commission (SEC), commonly review firms’ policies and procedures to ensure 1) that the document includes actual procedures and is not simply a list of policies and 2) that the stated procedures truly represent the procedures followed by the firm. Many firms have created their policies and procedures document based on template language, so tweaks may be necessary to customize the document for your firm.
Meaningful Composite Structure
The section of your GIPS policies and procedures requiring the most frequent adjustment is your firm’s list of composite descriptions, as you must make changes each time a new composite is added or if a composite closes. However, even without adding new strategies or closing older strategies, the list of composite descriptions should be reviewed at least annually to ensure they are defined in a manner that best represents the strategies as you manage them today.
Since your firm’s prospects will compare your composite results to those of similar firms, it is important that your composites provide a meaningful representation of your strategies and are easily comparable to similar composites managed by your competitors. If a review of your current list of composite descriptions leads you to realize that your strategies are defined too broadly, too narrowly, or in a way that no longer accurately describes the strategy, changes can be made (with disclosure).
Keep in mind that changes should not be made frequently and cannot be made for the purpose of making your performance appear better. Changing your composite structure for the purpose of improving your performance results, as opposed to improving the composite’s representation of your strategy, would be considered “cherry picking.”
Two examples of cases that may require a change in your composites include:
- A strategy has evolved and certain aspects of the way the strategy was managed and defined in the past are different from today. This can be addressed by redefining the composite. Redefining the composite requires you to disclose the date and description of the change. This disclosure will help prospects understand how the strategy was managed for each time period presented and when the shift in strategy took place. Changes like this should be made to your composite descriptions at the time of the change, but an annual review can help you address any items that may have been overlooked when the change occurred.
- A composite is defined broadly to include all large capitalization accounts. Within this large capitalization composite, there are accounts with a growth focus and others with a value focus. If your closest competitors are separately presenting large capitalization growth and large capitalization value composites, your broadly defined large capitalization composite may be difficult for prospects to meaningfully compare to your competitors. To address this, you can create new, more narrowly defined composites to separate the accounts with the growth and value mandates. In this case, the full history will be separated and the composite creation date disclosed for these new composites will be the date you make the change. Note that this will demonstrate to prospective clients that you had the benefit of hindsight when determining the definition.
Materiality Thresholds Stated in Your Error Correction Policy
Another section of your firm’s GIPS policies and procedures that should be reviewed in detail is your error correction policy. Your error correction policy includes thresholds that pre-determine which errors (of those that may occur in your GIPS Reports) are considered material versus those deemed immaterial. These thresholds cannot be changed upon finding an error; however, they can be updated prospectively if you feel a change would improve your policy.
Many firms had a difficult time setting these thresholds when this requirement first went into effect back at the start of 2011. Now that much more information is available to help you determine these thresholds, such as the GIPS Error Correction Survey, you may want to revisit your policy to ensure it is adequate.
Setting and approving materiality thresholds that determine material versus immaterial errors is a task best suited for your firm’s GIPS committee rather than your GIPS department or manager. The reason for this is that opinions of what constitutes a material error will vary from one department to another. Your committee can help find a balance between those with a more conservative approach and those with a more aggressive approach to ensure the thresholds selected are appropriate.
GIPS Verifier Selection and Due Diligence
If your firm is verified, it is important to periodically evaluate whether you are satisfied with the quality of the service received for the fees paid. You may also want to consider whether you need to conduct any periodic due diligence on your verification firm with respect to data security or other concerns important to your firm.
With several mergers, acquisitions, and start-ups in the verification community over the last few years, you may need to do some research to ensure you are familiar with what your options are when selecting a verification firm.
All verifiers have the same general objective: to test and opine on 1) whether your firm has complied with all of the composite construction requirements of the GIPS standards and 2) whether your firm’s GIPS processes and procedures are designed to calculate and present performance in compliance with GIPS. Where they differ is in the fees charged and process followed to complete the verification.
With regard to fees, much of the difference between verifiers is based on their level of brand recognition rather than differences in the quality of their service. For example, smaller firms specialized in GIPS verification may have more experience with the intricacies of GIPS compliance than a global accounting firm; yet, a global accounting firm will likely charge a higher fee. When selecting a higher fee firm, it is important to consider whether the higher fee is offset by the benefit your firm receives when listing their brand name as your verifier in RFPs you complete.
With regard to process, the primary difference between verification firms is whether the verification testing is done onsite or remotely. There are pros and cons to both methods and it is important for your firm to consider which works best for the team that is fielding the verification document requests. The onsite approach may result in finishing the verification in a shorter period, but may be disruptive to your other responsibilities while the verification team is in your office. The remote approach may be less disruptive to your other responsibilities, but likely will take longer to complete and may be less efficient as documents are exchanged back and forth over an extended period of time. Another difference is how the engagement team is structured, whether you can expect to work with the same team each year, and how much experience your main contact has.
Regardless of whether the verification is conducted onsite or remotely, be sure to ask any verifier how your proprietary information and confidential client data is protected. If the work is done remotely, how are sensitive documents transferred between your firm and the verifier (e.g., is it through email or a secure portal) and once received by the verifier, do they have strong controls in place to ensure your data is not breached.
If the work is done onsite, it is important to ask what documents (or copies of documents), if any, the verifier will be taking with them when they leave, and whether these documents are saved in a secure manner. Documents saved locally on a laptop are at higher risk of being compromised.
Questions?
For more information on how to maximize the benefits your firm receives from being GIPS compliant or for other investment performance and GIPS compliance information, contact Sean Gilligan at sean@longspeakadvisory.com.
How to Become GIPS Compliant
May 24, 2017
15 min
Many firms are interested in becoming GIPS compliant, but are intimidated by the initial process of bringing their firm into compliance. As long as you know the steps to become GIPS compliant and understand the options you have to complete each step, this process is very manageable. The information provided here is intended to provide you with a high-level overview of the steps you must complete to become GIPS compliant.
https://www.youtube.com/watch?v=E6zBnbW_OMU&feature=emb_logo
Before holding your firm out to the public as a GIPS compliant firm, there are three main steps that must first be completed. Firms must:
- Document GIPS policies and procedures
- Construct composites that consistently follow these policies and procedures
- Create compliant presentations to show the results of each composite
Document GIPS Policies and Procedures
Firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow in a document known as the firm’s GIPS Policies and Procedures (“GIPS P&P”). This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s GIPS policies as well as describe the procedures the firm follows to maintain their compliance. Examples of items typically found in this document include:
- Firm Definition – GIPS is applied to your firm as a whole, not to a single product or strategy you manage. How your firm is defined for GIPS purposes is primarily based on how the firm is held out to the public, which may differ from the legal structure of your firm.
- Definition of Discretion –Discretion is defined differently for GIPS than it typically is for legal or regulatory purposes. You may have a discretionary contract for an account that you deem to be non-discretionary for GIPS purposes because of restrictions the client places on the implementation of the strategy. The “Definition of Discretion” section of your firm’s GIPS P&P should outline objective criteria for determining the discretionary status of accounts.
- Policies Regarding Books and Records – Firms must be able to support all information included in compliant presentations as well as support that their client assets are real. This section of your P&P can outline the types of records that are maintained and in what format/location they are stored.
- Calculation Methodology – While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting accounts, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P.
- Composite Definitions and Rules – Firms must create policies to ensure that accounts are placed in the appropriate composite for the correct time period. The timing of the movement of accounts in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. Other optional rules, such as minimum account sizes and significant cash flow thresholds can also be documented here to keep accounts out of composites during periods where the intended strategy cannot be fully implemented.
- Error Correction Policies – Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material.
Construct Composites
After the GIPS P&P is created, firms can use these policies to construct the composites defined in the policy document. To do this, firms must:
- Identify all of the accounts that meet the definition of a composite. In other words, group all accounts by strategy, but then remove accounts that do not meet the firm’s definition of discretion or that do not meet a composite-specific rule, such as a minimum account size.
- Determine the correct time to include each account as well as remove any account that closed, changed strategies, or otherwise caused you to lose discretion. Portfolios must only be included in composites for periods in which they were considered discretionary for GIPS purposes. This helps ensure that the composite results accurately represent the firm’s management of the composite’s strategy and does not include outside noise created from client-requested restrictions.
- Asset-weight the monthly account-level results for each account included in the composite to calculate the composite-level performance results.
- Calculate all required composite-level statistics (see the list below) that must be included in the composite’s compliant presentation.
Create Compliant Presentations
Compliant presentations act as the firm’s external representation of their GIPS compliance and must be provided to all prospective clients. Each composite has a separate presentation that includes all of the required statistics as well as the required disclosures. Statistics included in compliant presentations include:
- Annual composite performance (gross and/or net)
- Annual benchmark performance
- Number of accounts in the composite as of each year-end
- Total assets in the composite as of each year-end
- Total assets of the GIPS firm as of each year-end
- A measure of internal dispersion for each annual period
- Three year annualized ex-post standard deviation of both the composite and the benchmark based on monthly returns
Other statistics may also be required such as the percentage of non-fee paying accounts or the percentage of bundled fee paying accounts as of each year-end, where applicable.
Want to Learn More?
If you have any questions about how to become GIPS Compliant, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis.
How to Comply with the 2020 GIPS Standards
April 23, 2020
15 min
A new decade is upon us and with the new decade comes a series of new requirements in terms of investment performance reporting for firms and asset owners that elect to claim compliance with the GIPS standards.
Many organizations have elected to adopt the 2020 edition of the GIPS standards early and have already put a solid foundation in place for the updated requirements; however, many organizations have not. The adoption deadline for all compliant organizations is rapidly approaching, so if your organization has not begun this conversion, now is the time to get started.
What is Changing and Why
It has been over a decade since the last edition of the GIPS standards was released, and quite frankly, the industry has changed since 2010. As the industry has evolved, CFA Institute has released a number of Q&A’s, guidance statements, and interpretations on how the changes in the industry impact the standards.
Ten years of updates have resulted in a vast repository of information needed to obtain the guidance required to comply. Having so many different resources for guidance (the 2010 GIPS Handbook, separate guidance statements, the Q&A database, and the GIPS Help Desk) has made managing the requirements of GIPS a pretty daunting task; thus, one of the goals of the 2020 standards is to centralize all of the updates that have come out over the past ten years. The 2020 GIPS standards consolidates many of the concepts previously addressed in guidance statements and Q&A’s, allowing the new provisions and explanation of the provisions to serve as the primary source that firms, asset owners, verifiers, and consultants can look to for guidance.
Additionally, the 2010 standards were heavily focused on composites and the traditional definition of prospective clients. Using this as the main framework is not always applicable to organizations that primarily manage pooled funds or asset owners that do not compete for business or report performance to prospective clients. To address this, CFA Institute set out to make this new edition of the standards more applicable to pooled fund managers and asset owners. These updates were designed to make claiming compliance easier and more relevant for these types of managers, while not creating additional burdens on organizations that are already compliant with GIPS. This goal is evident in the new format of the provisions, which separately focuses on requirements for investment firms, asset owners, and verifiers.
In addition to the separation of pooled funds and composites, the guidance is broader on when organizations may present money-weighted returns instead of time-weighted returns. This change now allows the decision to be based on the investment vehicle structure and who controls the timing and amount of external cash flows, rather than limiting money-weighted returns to certain asset classes. This is a welcomed update in the industry as many organizations were frustrated by requirements to calculate and present time-weighted returns when this type of return was not the most meaningful representation of how they managed their investment strategies.
How the 2020 GIPS Standards are Organized
For ease of use and navigation, the 2020 GIPS standards is broken out into three different groups of tailored provisions – firms, asset owners, and verifiers. Each containing specific requirements and recommendations applicable for that type of organization.
As an organization claiming compliance or working to become compliant for the first time, you will need to determine whether the set of requirements for firms or assets owners is applicable to your claim of compliance. The primary distinguishing factor is whether your organization competes for business and manages external money, or reports to an oversight board and manages internal money. The answer to this determines which set of tailored provisions should be followed and sets the framework for how the standards will apply.
Where to Start – GIPS Compliance Updates
Regardless of whether you are excited for the updates to the standards, they are coming and will be required for all firms and asset owners claiming compliance with GIPS. The new requirements take effect once your GIPS Reports (formerly called Compliant Presentations) present performance information that is inclusive of the period 31 December 2020.
There is a lot of information available and dissecting everything that has been released can be overwhelming. For organizations that have never claimed compliance, the good news is that the new standards are more applicable and easier to adopt than they were previously.
For most organizations currently claiming compliance, what’s great is that the new standards do not require a lot of changes, rather they mostly provide optional procedures that you may choose to adopt if you find it beneficial to do so. However, some firms will require more work.
At Longs Peak, we have created the following questionnaire designed to help you determine if converting to the 2020 GIPS standards will require more than a few minor tweaks. This list does not include all changes, but includes the top ten material changes that may require a project plan to implement the required changes by the effective date of the 2020 GIPS standards.
Answering “Yes” to any of the following questions means your organization may require more than a few quick tweaks to implement the 2020 changes:
GIPS 2020 Checklist
- Does your firm have limited distribution pooled funds (i.e., private funds that are not regulated under a framework that would permit the general public to purchase shares in the fund without a one-on-one presentation)?
- Has your firm created single account composites for pooled funds solely for the purpose of meeting the GIPS requirement of having every discretionary, fee-paying portfolio in at least one composite?
- Does your firm have multi-strategy portfolios (e.g., balanced portfolios where the equity and fixed income segments each could be represented as standalone strategies) where you would like to carve-out the individual strategies into their own composites?
- Does your firm have portfolios where actual transaction costs are unavailable (e.g., wrap accounts or other bundled fee arrangements) and you would like to estimate transaction costs to show gross-of-fee returns without labeling the returns as supplemental information?
- Does your firm have portfolios where your firm controls the amount and timing of external cash flows (other than for private equity or real estate) and you would like to present money-weighted returns rather than time-weighted returns?
- Does your firm have real estate or private equity composites?
- Does your firm include theoretical performance (e.g., model performance) as part of a GIPS report?
- Does your firm follow the Advertising Guidelines to claim compliance with the GIPS standards outside of your GIPS Reports?
- Does your firm currently update your GIPS compliant presentations more than 12 months after the year ends?
- Does your firm have advisory-only assets or uncalled committed capital you wish to present in your GIPS Report?
Although the intent is for the adoption of the standards to be more relevant, many organizations find themselves asking “where do I even begin?” The great news is that you don’t have to figure this all out on your own.
At Longs Peak, we have spent countless hours familiarizing ourselves with the new standards and have helped all of our clients begin to adopt the changes. We know what issues come up and how to navigate the changes required.
As a consultant, we do not have independence requirements like your verifier, so we can actually help you implement many of the 2020 changes required for your organization. If you do not already work with a GIPS consultant, now may be a good time to consider hiring one, especially if you lack the resources needed to get this done by the deadline to convert to the 2020 GIPS standards.
Contact us if you do not wish to read through all of the requirements and recommendations to identify what actions are required for your organization.
Finally, if you would like to read more about what changed and why, we have summarized the main changes to the GIPS standards in GIPS 2020 What’s Changing and What you Should Do.
Recommended Post
Key Takeaways from the 29th Annual GIPS® Standards Conference in Phoenix
The 29th Annual Global Investment Performance Standards (GIPS®) Conference was held November 11–12, 2025, at the Sheraton Grand at Wild Horse Pass in Phoenix, Arizona—a beautiful desert resort and an ideal setting for two days of discussions on performance reporting, regulatory expectations, and practical implementation challenges. With no updates released to the GIPS standards this year, much of the content focused on application, interpretation, and the broader reporting and regulatory environment that surrounds the standards.
One of the few topics directly tied to GIPS compliance with a near-term impact relates to OCIO portfolios. Beginning with performance presentations that include periods through December 31, 2025, GIPS compliant firms with OCIO composites must present performance following a newly prescribed, standardized format. We published a high-level overview of these requirements previously.
The conference also covered related topics such as the SEC Marketing Rule, private fund reporting expectations, SEC exam trends, ethical challenges, and methodology consistency. Below are the themes and observations most relevant for firms today.
Are Changes Coming to the GIPS Standards in 2030?
Speakers emphasized that while no new GIPS standards updates were introduced this year, expectations for consistent, well-documented implementation continue to rise. Many attendee questions highlighted that challenges often stem more from inconsistent application or interpretation than from unclear requirements.
Several audience members also asked whether a “GIPS 2030” rewrite might be coming, similar to the major updates in 2010 and 2020. The CFA Institute and GIPS Technical Committee noted that:
· No new version of the standards is currently in development,
· A long-term review cycle is expected in the coming years, and
· A future update is possible later this decade as the committee evaluates whether changes are warranted.
For now, the standards remain stable—giving firms a window to refine methodologies, tighten policies, and align practices across teams.
Performance Methodology Under the SEC Marketing Rule
The Marketing Rule featured prominently again this year, and presenters emphasized a familiar theme: firms must apply performance methodologies consistently when private fund results appear in advertising materials.
Importantly, these expectations do not come from prescriptive formulas within the rule. They stem from:
1. The “fair and balanced” requirement,
2. The Adopting Release, and
3. SEC exam findings that view inconsistent methodology as potentially misleading.
Common issues raised included: presenting investment-level gross IRR alongside fund-level net IRR without explanation, treating subscription line financing differently in gross vs. net IRR, and inconsistently switching methodology across decks, funds, or periods.
To help firms void these pitfalls, speakers highlighted several expectations:
· Clearly identify whether IRR is calculated at the investment level or fund level.
· Use the same level of calculation for both gross and net IRR unless a clear, disclosed rationale exists.
· Apply subscription line impacts consistently across both gross and net.
· Label fund-level gross IRR clearly, if used(including gross returns is optional).
· Ensure net IRR reflects all fees, expenses, and carried interest.
· Disclose any intentional methodological differences clearly and prominently.
· Document methodology choices in policies and apply them consistently across funds.
This remains one of the most frequently cited issues in SEC exam findings for private fund advisers. In short: the SEC does not mandate a specific methodology, but it does expect consistent, well-supported approaches that avoid misleading impressions.
Evolving Expectations in Private Fund Client Reporting
Although no new regulatory requirements were announced, presenters made it clear that limited partners expect more transparency than ever before. The session included an overview of the updated ILPA reporting template along with additional information related to its implementation. Themes included:
· Clearer disclosure of fees and expenses,
· Standardized IRR and MOIC reporting,
· More detail around subscription line usage,
· Attribution and dispersion that are easy to interpret, and
· Alignment with ILPA reporting practices.
These are not formal requirements, but it’s clear the industry is moving toward more standardized and transparent reporting.
Practical Insights from SEC Exams—Including How Firms Should Approach Deficiency Letters
A recurring theme across the SEC exam sessions was the need for stronger alignment between what firms say in their policies and what they do in practice. Trends included:
· More detailed reviews of fee and expense calculations, especially for private funds,
· Larger sample requests for Marketing Rule materials,
· Increased emphasis on substantiation of all claims, and
· Close comparison of written procedures to actual workflows.
A particularly helpful part of the discussion focused on how firms should approach responding to SEC deficiency letters—something many advisers encounter at some point.
Christopher Mulligan, Partner at Weil, Gotshal & Manges LLP, offered a framework that resonated with many attendees. He explained that while the deficiency letter is addressed to the firm by the exam staff, the exam staff is not the primary audience when drafting the response.
The correct priority order is:
1. The SEC Enforcement Division
Enforcement should be able to read your response and quickly understand that: you fully grasp the issue, you have corrected or are correcting it, and nothing in the finding merits escalation.
Your first objective is to eliminate any concern that the issue rises to an enforcement matter.
2. Prospective Clients
Many allocators now request historical deficiency letters and responses during due diligence. The way the response is written—its tone, clarity, and thoroughness—can meaningfully influence how a firm is perceived.
A well-written response shows strong controls and a culture that takes compliance seriously.
3. The SEC Exam Staff
Although examiners issued the letter, they are the third audience. Their primary interest is acknowledgment and a clear explanation of the remediation steps.
Mulligan emphasized that firms often default to writing the response as if exam staff were the only audience. Reframing the response to keep the first two audiences in mind—enforcement and prospective clients—helps ensure the tone, clarity, and level of detail are appropriate and reduces both regulatory and reputational risk.
Final Thoughts
With no changes to the GIPS standards introduced this year, the 2025 conference in Phoenix served as a reminder that the real challenges involve consistency, documentation, and communication. OCIO providers in particular should be preparing for the upcoming effective date, and private fund managers continue to face rising expectations around transparent, well-supported performance reporting.
Across all sessions, a common theme emerged: clear methodology and strong internal processes are becoming just as important as the performance results themselves.
This is exactly where Longs Peak focuses its work. Our team specializes in helping firms document and implement practical, well-controlled investment performance frameworks—from IRR methodologies and composite construction to Marketing Rule compliance, fee and expense controls, and preparing for GIPS standards verification. We take the technical complexity and turn it into clear, operational processes that withstand both client due diligence and regulatory scrutiny.
If you’d like to discuss how we can help strengthen your performance reporting or compliance program, we’d be happy to talk. Contact us.
From Compliance to Growth: How the GIPS® Standards Help Investment Firms Unlock New Opportunities
October 30, 2025
15 min
From Compliance to Growth: How the GIPS® Standards Help Investment Firms Unlock New Opportunities
For many investment managers, the first barrier to growth isn’t performance—it’s proof.
When platforms, consultants, and institutional investors evaluate new strategies, they’re not just asking how well you perform; they’re asking how you measure and present those results.
That’s where the GIPS® standards come in.
More and more investment platforms and allocators now require firms to comply with the GIPS standards before they’ll even review a strategy. For firms seeking to expand their reach—whether through model delivery, SMAs, or institutional channels—GIPS compliance has become a passport to opportunity.
The Opportunity Behind Compliance
Becoming compliant with the GIPS standards is about more than checking a box. It’s about building credibility and transparency in a way that resonates with today’s due diligence standards.
When a firm claims compliance with the GIPS standards, it demonstrates that its performance is calculated and presented according to globally recognized ethical principles—ensuring full disclosure and fair representation. This helps level the playing field for managers of all sizes, giving them a chance to compete where it matters most: on results and consistency.
In short, GIPS compliance doesn’t just make your reporting more accurate—it makes your firm more credible and discoverable.
Turning Complexity Into Clarity
While the benefits are clear, the process can feel overwhelming. Between defining the firm, creating composites, documenting policies and procedures, and maintaining data accuracy—many teams struggle to find the time or expertise to get it right.
That’s where Longs Peak comes in.
We specialize in simplifying the process. Our team helps firms navigate every step—from initial readiness and composite construction to quarterly maintenance and ongoing training—so that compliance becomes a seamless part of operations rather than a burden on them.
As one of our clients put it, “Longs Peak helps us navigate GIPS compliance with ease. They spare us from the time and effort needed to interpret what the requirements mean and let us focus on implementation.”
Real Firms, Real Impact
We’ve seen firsthand how GIPS compliance can transform firms’ growth trajectories.
Take Genter Capital Management, for example. As David Klatt, CFA and his team prepared to expand into model delivery platforms, managing composites in accordance with the GIPS standards became increasingly complex. With Longs Peak’s customized composite maintenance system in place, Genter gained the confidence and operational efficiency they needed to access new platforms and relationships—many of which require firms to be GIPS compliant as a baseline.
Or consider Integris Wealth Management. After years of wanting to formalize their composite reporting, they finally made it happen with our support. As Jenna Reynolds from Integris shared:
“When I joined Integris over seven years ago, we knew we wanted to build out our composite reporting, but the complexity of the process felt overwhelming. Since partnering with Longs Peak in 2022, they’ve been instrumental in driving the project to completion. Our ongoing collaboration continues to be both productive and enjoyable.”
These are just two examples of what happens when compliance meets clarity—firms gain time back, confidence grows, and new business doors open.
Why It Matters—Compliance as a Strategic Advantage
At Longs Peak, we believe compliance with the GIPS standards isn’t a cost—it’s an investment.
By aligning your firm’s performance reporting with the GIPS standards, you gain:
- Access to platforms and institutions that require GIPS compliant firms.
- Credibility and trust in an increasingly competitive landscape.
- Operational efficiency through consistent data and documented processes.
- Scalability to support multiple strategies and distribution channels.
Simply put: compliance fuels confidence—and confidence drives growth.
Simplifying the Complex
At Longs Peak, we’ve helped over 250 firms and asset owners transform how they calculate, present, and communicate their investment performance. Our goal is simple: make compliance with the GIPS standards practical, transparent, and aligned with your firm’s growth goals.
Because when compliance works efficiently, it doesn’t slow your business down—it helps it reach further.
Ready to turn compliance into a growth advantage?
Let’s talk about how we can help your firm simplify the complex.
📧 hello@longspeakadvisory.com
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Performance reporting has two common pitfalls: it’s backward-looking, and it often stops at raw returns. A quarterly report might show whether a portfolio beat its benchmark, but it doesn’t always show why or whether the results are sustainable. By layering in risk-adjusted performance measures—and using them in a structured feedback loop—firms can move beyond reporting history to actively improving the future.
Why a Feedback Loop Matters
Clients, boards, and oversight committees want more than historical returns. They want to know whether:
· performance was delivered consistently,
· risk was managed responsibly, and
· the process driving results is repeatable.
A feedback loop helps firms:
· define expectations up front instead of rationalizing results after the fact,
· monitor performance relative to objective appraisal measures,
· diagnose whether results are consistent with the manager’s stated mandate, and
· adjust course in real time so tomorrow’s outcomes improve.
With the right discipline, performance reporting shifts from a record of the past toa tool for shaping the future.
Step 1: Define the Measures in Advance
A useful feedback loop begins with clear definitions of success. Just as businesses set key performance indicators (KPIs) before evaluating outcomes, portfolio managers should define their performance and risk statistics in advance, along with expectations for how those measures should look if the strategy is working as intended.
One way to make this tangible is by creating a Performance Scorecard. The scorecard sets out pre-determined goals with specific targets for the chosen measures. At the end of the performance period, the manager completes the scorecard by comparing actual outcomes against those targets. This creates a clear, documented record of where the strategy succeeded and where it fell short.
Some of the most effective appraisal measures to include on a scorecard are:
· Jensen’s Alpha: Did the manager generate returns beyond what would be expected for the level of market risk (beta) taken?
· Sharpe Ratio: Were returns earned efficiently relative to volatility?
· Max Drawdown: If the strategy claims downside protection, did the worst loss align with that promise?
· Up- and Down-Market Capture Ratios: Did the strategy deliver the participation levels in up and down markets that were expected?
By setting these expectations up front in a scorecard, firms create a benchmark for accountability. After the performance period, results can be compared to those preset goals, and any shortfalls can be dissected to understand why they occurred.
Step 2: Create Accountability Through Reflection
This structured comparison between expected vs. actual results is the heart of the feedback loop.
If the Sharpe Ratio is lower than expected, was excess risk taken unintentionally? If the Downside Capture Ratio is higher than promised, did the strategy really offer the protection it claimed?
The key is not just to measure, but to reflect. Managers should ask:
· Were deviations intentional or unintentional?
· Were they the result of security selection, risk underestimation, or process drift?
· Do changes need to be made to avoid repeating the same shortfall next period?
The scorecard provides a simple framework for this reflection, turning appraisal statistics into active learning tools rather than static reporting figures.
Step 3: Monitor, Diagnose, Adjust
With preset measures in place, the loop becomes an ongoing process:
1. Review results against the expectations that were defined in advance.
2. Flag deviations using alpha, Sharpe, drawdown, and capture ratios.
3. Discuss root causes—intentional, structural, or concerning.
4. Refine the investment process to avoid repeating the same shortcomings.
This approach ensures that managers don’t just record results—they use them to refine their craft. The scorecard becomes the record of this process, creating continuity over multiple periods.
Step 4: Apply the Feedback Loop Broadly
When applied consistently, appraisal measures—and the scorecards built around them—support more than internal evaluation. They can be used for:
· Manager oversight: Boards and trustees see whether results matched stated goals.
· Incentive design: Bonus structures tied to pre-defined risk-adjusted outcomes.
· Governance and compliance: Demonstrating accountability with clear, documented processes.
How Longs Peak Can Help
At Longs Peak, we help firms move beyond static reporting by building feedback loops rooted in performance appraisal. We:
· Define meaningful performance and risk measures tailored to each strategy.
· Help managers set pre-determined expectations for those measures and build them into a scorecard.
· Calculate and interpret statistics such as alpha, Sharpe, drawdowns, and capture ratios.
· Facilitate reflection sessions so results are compared to goals and lessons are turned into process improvements.
· Provide governance support to ensure documentation and accountability.
The result is a sustainable process that keeps strategies aligned, disciplined, and credible.
Closing Thought
Markets will always fluctuate. But firms that treat performance as a feedback loop—nota static report—build resilience, discipline, and trust.
A well-structured scorecard ensures that performance data isn’t just about yesterday’s story. When used as feedback, it becomes a roadmap for tomorrow.
Need help creating a Performance Scorecard? Reach out if you want us to help you create more accountability today!
