Around the Peak.

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.
Recommended
There is a common assumption among boutique investment managers that the Global Investment Performance Standards (GIPS®) are built for the largest firms in the industry — that compliance is something you pursue once you've reached a certain scale, a certain client type, or a certain level of institutional credibility.
That assumption is understandable. And it is costing firms real opportunities.
The GIPS standards have no AUM threshold to get started. There is no minimum number of clients or composites required before a firm can claim compliance. And increasingly, the institutional marketplace is not waiting for firms to reach some undefined moment of readiness before asking for it. If you are newer to the GIPS standards and want a foundation for what they are and why firms pursue them, start with our post What Are the GIPS Standards?
The Market Has Already Decided
The gatekeepers of institutional capital such as consultants, outsourced CIO platforms, model delivery networks, and institutional allocators, have been quietly raising the bar on performance reporting standards for years. GIPS compliance has shifted from a differentiator to a baseline expectation in many of these channels.
According to eVestment, two out of three manager searches conducted by investors and consultants on their platform exclude firms that are not GIPS compliant. That means boutique managers without a compliance claim are not being passed over, they are simply not being seen. As we explored in From Compliance to Growth, GIPS compliance has effectively become the price of admission for firms seeking to expand into institutional channels.
The question is not whether your firm will eventually need it. For most managers with institutional ambitions, the answer to that question is already yes. The real question is when you choose to pursue it, and whether you make that choice on your own terms or in response to a mandate you cannot afford to lose.
What Compliance Actually Builds Inside Your Firm
The benefits most managers focus on are external. Things like the credibility signal, the access to channels, the due diligence box that gets checked. Those benefits are real. But some of the most meaningful returns from GIPS compliance are internal.
Implementing the GIPS standards requires firms to formalize processes that often exist informally. Composite definitions. Discretion criteria. Benchmark selection rationale. Fee policies. Error correction procedures. For many boutique managers, the implementation process is the first time these decisions have been documented and applied consistently across the firm.
That discipline matters beyond GIPS compliance itself. A firm with clean, documented performance infrastructure is better positioned for regulatory examinations, investor due diligence, and operational due diligence reviews. It demonstrates to sophisticated allocators that the firm is run with the same rigor they apply to their own oversight responsibilities. And for firms that are not primarily focused on institutional distribution, this operational foundation has standalone value, the kind of infrastructure that supports sound governance regardless of who is asking. For more on what a well-governed GIPS compliance program looks like once it is in place, see What Good GIPS Compliance Governance Looks Like in Practice.
The Single Best Argument for Starting Now
Here is the point that does not get made often enough: the smaller your firm and the shorter your track record, the easier it is to become compliant. That ratio flips quickly as you grow.
Retroactively constructing composites across a large number of separate accounts is genuinely difficult work, particularly when no framework existed at the time to assign accounts to composites at inception, or to move accounts between composites as investment objectives changed, client restrictions were added or removed, or mandates evolved. Working through that history portfolio by portfolio, period by period, requires both detailed documentation and sound judgment. It is one of the most time-consuming phases of any GIPS compliance implementation, and the complexity compounds with every account and every year of history added.
A firm with 30 separate accounts and a two-year track record faces a very different implementation project than the same firm a few years later with 500 accounts and a five-year track record. The strategy, the clients, and the investment process may be nearly identical, but the administrative burden of reconstructing historical composite membership correctly is not.
The firms that find implementation most manageable are the ones that started before the project grew into something unwieldy. The firms that find it most painful are the ones that waited until an institutional prospect made it urgent.
What if you are not ready to commit to full compliance yet?
That is a legitimate position. But there is a practical middle path worth considering: even if a firm does not want to claim compliance with the GIPS standards today, building out the composite structure and creating policies and procedures for managing those composites now is a worthwhile investment. That framework does not require a formal compliance claim to be useful. Additionally, it can be carried directly into a full GIPS compliance program when the time is right, dramatically reducing the effort required at that stage.
The Real Costs
Becoming GIPS compliant requires real work, and it is worth being direct about what that entails. At a high level, implementation comes down to four phases: defining the firm, building a GIPS standards policies and procedures manual, constructing composites and calculating performance, and creating GIPS Reports with ongoing monitoring controls. We walk through each phase in detail in A Practical Framework for Implementing the GIPS Standards.
In terms of ongoing commitment, firms should expect monthly composite management, annual GIPS Report updates, periodic policies and procedures reviews, and distribution tracking. For a lean team, owning all of this internally is often not realistic. The good news is that outsourcing to a GIPS compliance consultant is a well-established path for boutique managers and one that many firms in our client base have taken successfully. The total cost of compliance for a focused, well-organized firm is frequently lower than managers expect, particularly when implementation is approached while the firm's history and account universe are still manageable.
Is This the Right Time for Your Firm?
Not every firm is at the same point in this decision. Managers with the strongest case for pursuing GIPS compliance now include:
- Firms actively pursuing institutional mandates or seeking coverage from investment consultants
- Managers on model delivery platforms or building toward that distribution channel
- Firms planning meaningful growth over the next two to three years
- Any manager whose clients or prospects have already raised the question
- Firms that simply want to build a best-in-class performance reporting foundation, regardless of where their distribution strategy stands today
The case is lower urgency for firms focused exclusively on high-net-worth or retail clients with no near-term institutional ambitions; however, there is still value in building a sound performance reporting structure, and the sooner it is established, the easier the work will be.
On Verification: You Can Wait
Verification is independent, voluntary, and valuable. It is also not required to claim compliance with the GIPS standards, and for cost-conscious boutiques, it is a reasonable place to exercise flexibility.
A firm can become GIPS compliant today and gain all the operational benefits and the ability to make the compliance claim and defer pursuing verification until there is specific demand for it. When an institutional prospect or consultant asks whether the firm is verified, that is the right moment to add it. The compliance foundation built now makes that future engagement faster and less disruptive. For a detailed walkthrough of what the verification process involves, see our series How to Survive a GIPS Verification.
Verification is worth having. It just does not need to happen on day one.
The Longer You Wait, The Heavier the Lift
GIPS compliance is not an initiative that gets easier with time. Every year a firm grows its account base, extends its track record, and adds complexity to its operations without a compliance framework in place is another year of history that will eventually need to be organized, documented, and reconstructed.
The managers who find implementation most straight forward are not the ones with the most resources. They are the ones who started early enough that the project was still proportionate to the size of the task.
If your firm is headed toward institutional distribution (most boutique managers we work with are), the best time to build this infrastructure is before you need it. The second best time is now.
Longs Peak Advisory Services specializes in GIPS compliance and investment performance consulting for investment managers and asset owners. We have helped over 250 firms implement and maintain compliance with the GIPS standards. If you are evaluating whether now is the right time for your firm, we would be glad to talk through it. Reach out athello@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.
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.
Mission-driven institutions are entrusted with something larger than capital. They are entrusted with purpose.
Endowments, foundations, and long-term investment pools exist to support education, healthcare, research, environmental initiatives, religious or cultural programs, community development, and countless other causes—often for generations.
That long-term horizon changes how investment performance should be reported. Because when an institution thinks in decades instead of quarters, investment performance is not just about what happened recently, itis about whether the portfolio is structured to sustain spending, preserve purchasing power, and remain aligned with its mission through full market cycles.
Many institutions rely entirely on their investment managers to calculate and present investment performance. That’s common, but it’s not always sufficient.
Performance Oversight Is Not the Same as Performance Results
Investment managers are responsible for generating returns. Boards and oversight committees are responsible for evaluating those results.
Those responsibilities are distinct.
Oversight is a fiduciary duty. It is not passive, and it cannot rely solely on the information created by the party being evaluated. Effective oversight requires independence, consistency, and clarity.
When the same party both manages assets and determines how performance is calculated and presented, the lines between management and oversight can blur—even when intentions are sound and calculations are technically accurate.
In some situations, reporting may not be:
- Consistent across managers
- Based on uniform calculation methodologies
- Presented in a format designed for governance review
- Structured to facilitate long-term policy evaluation
Consider a board reviewing results from three different managers. Each reports strong performance, but one calculates returns net-of-fees, another presents gross results, and a third uses slightly different valuation timing.
At first glance, the numbers appear comparable. In reality, they may not be measuring the same thing.
Some larger institutions maintain internal performance teams or engage independent performance professionals to standardize reporting, organize data across managers, and present results in accordance with established best practices—often aligning reporting with their Investment Policy Statement and/or recognized frameworks such as the Global Investment Performance Standards (GIPS® standards).
But many of these organizations operate lean. They may not have dedicated performance measurement expertise or the infrastructure required to consolidate, normalize, and present results in a governance-ready format.
In those cases, boards are often reviewing manager-produced materials that were designed primarily for client communication—not institutional oversight. Performance reporting for these institutions should be designed to serve the governing body—not simply to showcase results.
Why This Matters for Mission-Based Institutions
Boards of endowments and foundations are often composed of dedicated volunteers, philanthropists, community leaders, and subject-matter experts. They bring vision, experience, and commitment to the institution’s mission—but not always a deep understanding of investment management and reporting.
That makes investment performance clarity essential. When reporting is unclear, oversight weakens—not because trustees lack commitment, but because the information is not presented in a way that supports meaningful evaluation.
When reporting is structured and tied directly to policy benchmarks, risk parameters, and spending objectives, trustees know what questions to ask. Conversations remain focused on long-term sustainability and mission impact.
A Practical Framework for Strong Performance Reporting
Boards of mission-driven institutions are often operating at the governance-level and should evaluate their reporting structure against four questions:
1. Is performance calculated independently?
Independent calculation or oversight reduces potential conflicts and strengthens fiduciary governance. In institutional investing, separating portfolio management from performance oversight is widely viewed as a best practice.
2. Is the methodology consistent across managers?
Multi-manager portfolios require uniform return calculation, fee treatment, and valuation policies to ensure comparability. Without consistency, “relative performance” becomes difficult to interpret.
One practical way institutions address this challenge is by complying with and requiring their managers to comply with the GIPS® standards.
The GIPS standards are a globally recognized framework administered by CFA Institute designed to promote fair representation and full disclosure in the calculation and presentation of investment performance.
Endowments and foundations that adopt the GIPS standards for their own performance calculations—and require the same of the managers they hire—send a powerful message to their boards and stakeholders that the institution is committed to transparency in how results are calculated and presented.
3. Is reporting aligned with policy benchmarks?
Boards should see performance relative to long-term policy objectives, not just absolute returns. And this information should be shown at the level at which it is managed. Simply reporting that “the portfolio returned 8%” does not answer the real governance question.
A portfolio can have a positive year and still fail to meet its strategic role within the overall allocation.
For example:
- Did the equity allocation meet its return objective relative to its benchmark?
- Did the diversifying strategies provide the downside protection they were intended to deliver?
- Did fixed income serve its role as a stabilizer?
- Did alternative investments justify their complexity and liquidity constraints?
Even if the overall portfolio met its expected return, boards should understand how it got there. Reviewing performance by allocation allows boards to evaluate whether each segment is fulfilling its mandate, not just whether the total return looks acceptable.
When reported this way, it becomes easier to see where the portfolio is meeting expectations and where it may be falling short.
4. Is communication designed for governance?
Once performance is aligned to policy benchmarks, reporting should help trustees interpret what the results mean without requiring them to operate at the manager or security-selection level.
Reports should help answer key questions:
· Are we meeting long-term objectives?
· How are managers performing relative to their mandates?
· Is risk aligned with the investment policy?
· Are we preserving capital appropriately given our spending needs?
· Did managers follow investment guidelines that align with our institution’s mission?
If any of these areas underperform, governance-level reporting should prompt clear, high-level discussion: Why did this occur? Was the result consistent with expectations? What steps, if any, are being considered to address issues going forward? If shortfalls persist, boards may need to evaluate whether the strategy or manager remains appropriate.
This kind of oversight strengthens outcomes by reinforcing accountability. Performance reporting should be communicated in plain language and simplify complex data into clear actionable insight. When this occurs, it enables boards to move from procedural review toward informed, effective governance.
From Calculation to Communication
Accurate returns are the starting point. Clear communicationis the outcome.
When performance calculation, oversight, and presentation are thoughtfully structured, board discussions become more strategic and less reactive. Boards gain confidence in their oversight, managers operate within clearer expectations, and the institution stays focused on its purpose.
A Closing Thought
Mission-driven institutions think in decades, not quarters. Their performance reporting should reflect that same discipline. Investment oversight is not just about generating returns, it is about ensuring those returns are measured, understood, and aligned with the institution’s long-term purpose.
Clear reporting strengthens governance.
Strong governance protects sustainability.
And sustainability protects the mission.
If you’ve been around the Global Investment Performance Standards (GIPS®) long enough, you know that governance is one of those topics everyone agrees is important, but far fewer firms can clearly explain what good governance with the GIPS standards actually looks like day to day.
Most firms don’t fail at GIPS compliance because they misunderstand a technical requirement. They struggle because ownership is unclear, decisions are informal, or key knowledge lives in one person’s head. When that person leaves (or when the firm grows) things start to break.
So, let’s simplify this.
Below is a practical, real-world view of what good governance looks like when complying with the GIPS standards—not in theory, not in a policy document that no one reads, but in how well-run firms actually operate.
Start with the Right Mindset: Governance Is About Sustainability
At its core, GIPS compliance exists to answer one question:
Can this firm consistently calculate, maintain, and present performance fairly and accurately—regardless of growth, staff changes, or market stress?
The GIPS standards are built on the principles of fair representation and full disclosure, but governance is what turns those principles into repeatable behavior. Good governance doesn’t mean more paperwork or compliance headaches. It means clear accountability, documented decisions, and controls that actually get used.
1. Clear Ownership (It’s Rarely Just One Person)
One of the most common governance risks we see is a “GIPS compliance department of one” where critical knowledge, decisions, and processes are concentrated with a single individual. While this can work in the short term, it creates challenges around continuity, oversight, and scalability as the firm grows or changes.
Good governance starts by clearly defining:
- Who owns GIPS compliance overall
- Who performs monthly/quarterly/annual tasks
- Who reviews and approves key inputs/outputs
- Who resolves judgment calls
- Who ensures it also complies with other relevant regulations
In practice, this often looks like:
- A GIPS compliance committee or designated governance group
- Representation from performance, compliance, operations, and senior management
- Defined escalation paths for gray areas (e.g., discretion, composite changes, error corrections)
When a firm isn’t large enough to support a formal committee, outsourcing to a GIPS compliance consultant or a provider of managed services can be an effective alternative. These individuals can help you design policies, create procedures, and essentially manage governance for you.
But even if you are big enough, having an independent third party on your GIPS compliance committee can provide an objective, well-informed perspective formed by experience across many firms and a deep understanding of what works well in practice.
2. Policies and Procedures That Reflect Reality
Every GIPS compliant firm has GIPS standards policies and procedures (GIPS standards P&P). Well-governed firms actually use them.
Strong GIPS compliance governance means your GIPS standards P&P:
- Include procedures your firm actually follows instead of only stating policies
- Reflect how performance is really calculated
- Clearly document firm-specific elections and judgments
- Are updated when the business changes (for new products, systems, asset classes)
Think of your GIPS standards P&P as the firm’s operating manual for performance, not a static compliance artifact. If someone new joined your performance team tomorrow, they should be able to follow your policies and procedures to calculate performance and arrive at the same results. If not, governance needs work.
3. Formalized Review and Oversight
Good governance includes independent review, even if it’s internal.
In practice, this often means:
- Secondary review of composite membership decisions
- Review of significant cash flow thresholds and discretion determinations
- Approval of new composites and composite definition changes
- Oversight of error identification and correction
This is where governance protects firms from subtle but costly mistakes, especially those that show up during verification and increase complexity and scope of these engagements. In an ideal situation, these internal reviews should catch issues before they become problems.
As a provider of managed services, Longs Peak helps firms identify performance outliers, accounts that are breaking composite rules, and other data anomalies. This review significantly reduces the risk of erroneous data ending up in your performance and later caught in verification. If you are not able to do this internally, we strongly recommend outsourcing this effort.
4. Governance Extends to Marketing and Distribution
One area that has been increasingly important is the intersection of GIPS compliance, the SEC marketing rule, and how you manage the distribution of marketing materials.
Well-governed firms:
- Control who can distribute GIPS Reports and how they are distributed
- Ensure Marketing understands what is and is not an advertisement that meets the requirements of the GIPS standards
- Coordinate GIPS compliance requirements with broader regulatory rules, including the SEC marketing rule
- Have a clear process for tracking distribution
This alignment helps firms avoid inconsistencies between factsheets, pitchbooks, and GIPS Reports—one of the fastest ways to lose credibility with prospects and regulators.
Some clients prefer not to mention GIPS compliance at all in their marketing (i.e., on their factsheets and pitchbooks) until a client is clearly interested in one of their strategies. Once they meet the definition of a prospect (as outlined in your GIPS standards P&P), it triggers the requirement to send a GIPS Report and they find this smaller list of prospects easier to maintain. For others, having everything in one document including required GIPS compliance information and disclosures is easier to manage than separate documents.
There is no “right” way to manage this, but in either case, having a clear process for tracking and reporting performance errors is key.
5. Documentation of Decisions (Not Just Results)
Here’s a subtle but critical point: Good governance for your GIPS compliance program documents decisions, not just outcomes.
Why was that composite redefined?
Why was this benchmark changed?
Why was this model fee selected?
Strong governance creates an audit trail that:
- Supports sound reasoning (which aides in the verification process or even regulatory exams later on)
- Reduces key person risk
- Makes future reviews faster and less stressful
This is especially valuable when firms grow, merge, or experience turnover. Clear documentation allows others to step in seamlessly and continue critical functions without disruption. More importantly, it enables independent parties, such as a regulator or your verifier, to understand, assess, and validate how you are calculating and presenting performance that may not be immediately intuitive.
6. Governance Is Ongoing, Not a One-Time Project
The best-governed firms don’t “set and forget” their GIPS compliance program. They revisit governance when:
- New strategies launch
- Systems or custodians change
- Regulations evolve
- The firm’s structure changes
In other words, governance evolves with the business—because performance reporting doesn’t exist in a vacuum.
Even for firms that are not regularly launching new strategies, changing systems or structure, an annual review of your GIPS compliance program and governance framework is critical. This review helps confirm that practices have remained consistent, while also providing an opportunity to reflect on whether you are satisfied with your verifier, assess whether new regulations require updates, and reconsider how composites are managed or described.
The best time to do this is at year-end so that if you decide something should be changed, you can do that proactively for the upcoming year, rather than having to fix it retroactively.
What Good GIPS Compliance Governance Really Buys You
When GIPS compliance governance is working well, firms experience:
- A structured, intentional process for validation of your performance results
- A framework that supports consistency and transparency over time
- Fewer surprises or last-minute scrambles during verification or regulatory review
- Greater confidence from regulators and verifiers that you are following established policies and procedures
- Lower operational and reputational risk
Most importantly, it creates trust internally and externally. Good GIPS compliance governance isn’t about being perfect. It’s about being intentional.
Clear ownership. Thoughtful documentation. Real oversight. Those are the firms that don’t just claim compliance, they live it.
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
Article Topics

The Sharpe Ratio is calculated as the strategy’s mean return minus the mean risk-free rate divided by the standard deviation of the strategy. The Sharpe Ratio measures the excess return for taking on additional risk.
As one of the most popular performance appraisals measures, the Sharpe Ratio is used to compare and rank managers with similar strategies.
Sharpe Ratio Formula

Annualized Sharpe Ratio
When calculating the Sharpe Ratio using monthly data, the Sharpe Ratio is annualized by multiplying the entire result by the square root of 12.
What is a Good Sharpe Ratio?
The Sharpe Ratio is a ranking device so a portfolio’s Sharpe Ratio should be compared to the Sharpe Ratio of other portfolios rather than evaluated independently.
Since the Sharpe Ratio measures excess return per unit of risk, investors prefer a higher Sharpe Ratio when comparing similarly managed portfolios.
Example Sharpe Ratio Calculation
Suppose two similar strategies, Strategy A and Strategy B, had the following characteristics over one year. For this period, the average monthly risk-free rate is 0.10%.

Please note that the Sharpe Ratio calculated in this example is based on monthly data and, therefore, must be annualized to get the final result. The full calculation is as follows:

Although the strategies have the same average monthly return over the one-year period, the Sharpe Ratios differ significantly due to their differences in volatility (i.e., standard deviation). Because Strategy B has a much higher Sharpe Ratio, it is preferred over Strategy A to an investor deciding between the two.
Sharpe Ratio Interpretation
The Sharpe Ratio is intended to be used for strategies with normal return distributions; it should not be used for a strategy that treats upside and downside volatility differently. The Sharpe Ratio treats both types of volatility the same. For example, if a manager is looking for high reward investments then upside volatility can be a good thing, but the Sharpe Ratio penalizes the strategy for any type of volatility. For return streams with non-normal distributions, such as hedge funds, the Sortino Ratio may be more appropriate.
Why is the Sharpe Ratio Important?
The Sharpe Ratio is important when assessing portfolio performance because it adjusts for risk. Comparing returns without accounting for risk does not provide a complete picture of the strategy.
The Sharpe Ratio is commonly used in investment strategy marketing materials because it is the most widely known and understood measure of risk-adjusted performance.
Sharpe Ratio Calculation: Using Arithmetic Mean or Geometric Mean
Because the Sharpe Ratio compares return to risk (through Standard Deviation), Arithmetic Mean should be used to calculate the strategy return and risk-free rate’s average values. Geometric Mean penalizes the return stream for taking on more risk. However, since the Sharpe Ratio already accounts for risk in the denominator, using Geometric Mean in the numerator would account for risk twice.

SEC Proposes to Enhance Private Fund Marketing
Recently we have observed numerous trends in the investment industry for a higher level of transparency and more standardized reporting from investment managers. To name a few, the SEC is pushing for more comprehensive advertising requirements with the Modernized Marketing Rule for Investment Advisors and FINRA with rule 2210 for Communications with the Public for Fund Managers. The most recent proposed update for standardized performance reporting has come from the SEC in a series of amendments aiming to enhance private fund reporting.
Liquid Fund Performance:
A liquid fund, defined as “any private fund that seeks to generate income by investing in a portfolio of short-term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors,” is required to present annual total investment returns on a net basis since the inception of the fund. In addition to the annual net return requirements, the proposal also requires the presentation of annualized net returns covering a one-, five-, and ten-year period (as well as since-inception if the fund has not been in existence for any of the stated time periods required). An additional metric the proposal is pushing for is the cumulative return through the most recent period end (defined as the most recent quarter-end), net-of-fees.
Illiquid Fund Performance:
An illiquid fund, which is defined as “any fund investing in securities that cannot be sold or disposed of in the ordinary course of business within seven calendar days at approximately the value ascribed to it by the fund,” is required to present a series of money-weighted return statistics (e.g., Internal Rate of Return (“IRR”)). These statistics include the gross and net since-inception money-weighted return and the gross invested capital multiple (also known as the “MOIC”) as of the most recent calendar quarter-end, without the impact of any subscription lines of credit used.
Disclosures:
Both liquid and illiquid funds will be expected to include robust disclosures regarding the adopted calculation methodology and any assumptions made in the calculation of presented statistics. In addition to the criteria being used, illiquid funds will be expected to include prominent disclosures regarding the contributions and withdrawals to and from fund investors, as well as the fund’s current net asset value. Outside of calculation methodologies, the SEC is proposing detailed disclosures to be required outlining any and all applicable fees and expenses that have been, and are expected to be, incurred in the management of the fund. These proposed disclosures would be in addition to existing required SEC disclosures.
Comment Period:
These proposed rules are not yet finalized. The public comment period will remain open for 60 days proceeding the release on these proposed rules amendments (which was released in February 2022). Once the comment period concludes, the SEC will consider feedback provided and finalize the new amendments. For more information on this recent press release, and the proposed amendments to the rule, see the full press release here.
Contact Us
Longs Peak is a consulting firm specialized in helping investment firms and asset owners calculate and present investment performance. If you need assistance preparing for any of these new proposed rules, please contact us at hello@longspeakadvisory.com or visit our website at https://longspeakadvisory.com/.

Longs Peak Makes Matt Deatherage, CFA, CIPM Partner
LONGMONT, Colorado, January 12, 2022 – Longs Peak Advisory Services, LLC (“Longs Peak”) announced today that the company has appointed Matthew Deatherage, CFA, CIPM as equity Partner, effective January 1, 2022.
Mr. Deatherage has over 8 years of experience specifically in GIPS and Investment performance and has worked with some of the world’s largest financial institutions to help them with their GIPS compliance. Before being promoted, Matt served as a Senior Manager and member of Longs Peak’s Executive Team. In this role, he was responsible for developing the company’s Client Experience, Training & Development, and Quality Control processes. In addition, Matt spearheads Longs Peak’s Alternative Asset Management GIPS projects. Since joining, Matt has helped the company nearly double the number of clients we serve. Prior to working at Longs Peak, Matt worked for ACA Compliance Group and Ashland Partners.
“I am honored to be made Partner," said Matt. "In my experience with the company, I’ve developed a deep appreciation for what makes Longs Peak so special. Longs Peak’s success is rooted in the team we have built and the customers we serve. I believe we have so much opportunity to capitalize on this foundation, innovate for the future and continue to grow. I look forward to continuing to work with our global client base and growing team to deliver on our goal to simplify how investment firms calculate and present investment performance."
“We have all been impressed by Matt’s leadership and track record of operating with excellence, executing on client engagements and cultivating a team that drives results. Matt has consistently delivered on building our client relationships and our team’s expertise,” said Jocelyn Gilligan, CFA, CIPM, Partner. “Longs Peak wouldn’t be the same without him.”
“Since meeting Matt almost a decade ago when we both worked for a large GIPS verification firm, I knew he had a lot of potential,” said Sean Gilligan, CFA, CPA, CIPM, Managing Partner. “His experience and ambition add a ton of value to our clients and our firm. The entire Longs Peak team is excited about his promotion as we all benefit so much from his leadership and technical expertise. We know he has the drive to help bring Longs Peak and our clients into a new chapter of growth and success.”
About Longs Peak
Longs Peak Advisory Services, LLC is a consulting firm specialized in helping investment firms and asset owners calculate and present investment performance. Longs Peak has worked with over 170 firms across North America, Europe, and Asia since its inception in 2015 to help them calculate and present investment performance or comply with the GIPS Standards.
Contact
Longs Peak
Matt Deatherage, CFA, CIPM
Related Links:
https://longspeakadvisory.com/

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.

What is Up-Market & Down-Market Capture Ratio?
What do Capture Ratios Explain?
Capture ratios help investors assess how a strategy holds up during different market conditions. They can be used to demonstrate how a strategy performs across different cycles of the market by quantifying how much of the market performance your strategy “captures” on the way up or on the way down.
What is the Up-Market Capture Ratio?
The Up-Market Capture Ratio evaluates a strategy's performance in up-markets. It measures how well a manager performed relative to its benchmark during rising market conditions. The ratio is calculated by dividing the average strategy returns by the average returns of the benchmark, but only including periods where the benchmark returns were positive.
Up-Market Capture Formula

How to interpret the Up-Market Capture Ratio
It is best to compare the results of both Up-Market and Down-Market Capture to 100. For Up-Market Capture, it is ideal to have a result greater than 100 because this signifies that the strategy outperformed the benchmark while the market is rising. For example, if the Up-Market Capture is 115, this shows that the strategy outperformed the benchmark by 15% during the period. This is a helpful indicator for managers that want to demonstrate that their strategy will beat the index during rising market conditions.
However, because this measure focuses on the upside, it will not give you a full picture of the strategy’s performance. A defensive strategy, focused on downside protection, may have a low up-market capture, but still be outperforming because of its low market capture on the downside. It is therefore most common to present this measure in conjunction with the Down-Market Capture Ratio, to provide a more complete picture of overall performance.
What is the Down-Market Capture Ratio?
The Down-Market Capture Ratio assesses a strategy's performance in down-markets and measures how well a manager performed relative to the index while the market is falling. Similar to Up-Market Capture, it is calculated by dividing the average strategy returns by the average returns of the benchmark, but only including periods where the benchmark returns were negative.
Down-Market Capture Formula

How to interpret the Down-Market Capture Ratio
For the Down-Market Capture Ratio, it is ideal to have a result less than 100 because this signifies that the strategy outperformed the benchmark while the market is falling. For example, if the Down-Market Capture is 90, this shows that, on average, the strategy declined only 90% as much as the benchmark did during down periods. This is a helpful indicator for managers that want to demonstrate that their strategy outperforms during market decline. Again, because this measure focuses only on the downside, it will not provide a full picture of the strategy’s performance and should be presented together with the Up-Market Capture Ratio to provide a more complete picture.
What is Total Capture Ratio?
Total Capture Ratio measures the asymmetry of returns, quantifying overall performance across different phases of the market. Total Capture Ratio is calculated by dividing the Up-Market Capture Ratio by the Down-Market Capture Ratio.
Total Capture Ratio Formula

How to interpret Total Capture Ratio
A Capture Ratio greater than one (1) indicates that the strategy outperformed the benchmark overall. For example, if the Down-Market Capture is 115, but Up-Market Capture is 130, this gives you a Total Capture Ratio of 1.13, indicating that the performance in rising markets offsets the performance during market slump. The same is true for strategies whose primary objective is to protect on the downside. Even when up-market capture is low or breaks even, if the strategy performs well in down markets, it can still outperform the market overall. For example, an up-market capture of 80 and down-market capture of 60 results in total capture of 1.33.
Why are Capture Ratios Important?
Capture ratios are used to assess whether a strategy is performing according to its investment objective. If the goal of the strategy is to outperform its benchmark, Capture ratios will help demonstrate how the strategy outperformed – whether on the up-side, down-side or overall.
Questions?
If you have questions our would like help calculating risk statistics for your strategy, contact us. Or check out other investment performance statistics we've written about, including the Sharpe Ratio, Information Ratio, and others.

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.

What is Batting Average in Finance?
In baseball, Batting Average is one of the oldest and most universal tools to measure a player’s success at the plate. Similarly, Batting Average is used in investment performance analysis to measure a manager’s success “at bat,” but there is significantly less cheering involved by spectators!
What is Financial Batting Average?
When used for investment performance analysis, Batting Average is a statistic that measures how often a manager or strategy outperforms its benchmark. It is calculated by taking the number of times the strategy beats the benchmark divided by the total number of instances in the period (whether daily, monthly, quarterly, etc.).
Financial Batting Average Formula

How to interpret Batting Average
Batting Average allows managers to demonstrate how consistently they outperform. The closer this number is to 1.000 (or 100%) the better. A strategy with a batting average of 0.500, has outperformed its benchmark only half the time, whereas a strategy with a batting average of 1.000 has consistently outperformed the benchmark for every period under review. For example, a strategy that beat the index 18 out of 36 months would have a statistical batting average of 0.500 or 50%.
Luckily, we hold our investment managers to a higher standard than players in the MLB. While a baseball batting average of 0.300 (or 30%) may be considered outstanding, 0.500 (or 50%) is often considered a minimum threshold to be considered successful in investment management.
Why is Batting Average Important?
Like many statistical tools, Batting Average is used to assess whether a strategy is performing according to its investment objective. If the goal of the strategy is to consistently outperform its benchmark, Batting Average is an easy calculation to assess whether this is true.
Batting Average is particularly useful in demonstrating consistency. For example, in baseball, a player with 4 RBIs (runs batted in) in a game may have had a grand slam in one at-bat and struck out every other time at the plate. Another player with 4 RBIs may have hit a solo homerun every time he batted that game. While their RBIs are the same, the second player has a much higher Batting Average for the game because he was more consistent. Similarly, when assessing an investment manager’s performance, investors are often looking for consistency – to determine if the manager had one period with significant outperformance but underperforms most periods, or if the manager consistently outperforms. Batting Average can help explain this.
One drawback to using Batting Average is that it focuses only on returns and does not consider the risk taken by a strategy to achieve those returns. It is therefore a good idea to use Batting Average in addition to other statistical measures to demonstrate skill when considering risk. The Information Ratio is a common measure used in conjunction with Batting Average. It is similar in that it evaluates a strategy’s success beyond the benchmark, but it takes into account the volatility (or risk) of achieving those returns.
Contact Us
If you have any questions about investment performance or GIPS compliance Contact Us or email Sean Gilligan, CFA, CPA, CIPM.

How to Survive a GIPS Verification Part 2: Kick-off and Initial Data Request
This article is part two of a three-part series on how to survive a GIPS verification. If you haven’t had a chance to read part one, we recommend going back and reading the first part of this series, which covers tips and tricks for setting up your verification for success. In this article, we cover recommendations for kicking off the verification and then provide some context around responding to the initial request made by the verifier. Understanding what the verifier is requesting and why they need it will help streamline the response and allow you to send only the information that is necessary.
Kicking off the Verification
Many firms are eager to quickly get through their verification. One way to help promote efficiency is to schedule a call with your verifier before they even send their initial request. The kick-off call will help ensure everyone is on the same page – especially if it is your first verification or if your firm and strategies have changed since the last verification was completed. For first-time verifications, this time should be used to communicate unique aspects of your firm, discuss the timeline, and introduce key members of your project team.
Most verifications are completed annually. A lot can change over the course of a year that may impact your compliance with the GIPS standards. The kickoff call will initiate these discussions at the onset so surprises don’t delay your ability to complete the verification. The following are some items to consider discussing during a kick off call:
- Any changes to the definition of your firm for GIPS purposes – such as acquisitions, mergers, portfolios moving to/from model-based platforms (e.g., UMA)
- Any new or closed composites or pooled funds
- Any material changes to your GIPS policies and procedures
- Any personnel changes at the firm – especially with individuals that are involved in the verification project
- Any upcoming deadlines that impact the timing of the verification
What to expect with the Initial Data Request
Once all parties are ready to begin the verification, your verifier will provide their initial data request, which lists all items the verifier needs to get the verification process started. After these items are received and reviewed, additional samples will be requested for the verifier to complete more detailed testing. These follow-up testing items are discussed in part three of this series. The most common items requested in this initial data request include:
- GIPS Policies & Procedures
- List of Composites and/or Pooled Funds
- Portfolio and Composite Performance
- Composite Membership Change List
- Assets Under Management (“AUM”) Report
- List of Non-Discretionary Portfolios
- GIPS Reports
- GIPS Report Distribution Log
- Marketing Materials
- CFA Notification Form
- Other miscellaneous items such as (where applicable):
- Regulatory Correspondence
- Changes to your Portfolio Accounting System
- Error(s) Since the Last Verification
- Incentive Fees Charged
The following sections discuss each of these commonly requested items in more detail.
Policies and Procedures
GIPS policies and procedures are one of the most important documents the verifier needs to get the verification started. The end goal of verification is the opinion letter that attests to “whether the firm's policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis.”
In other words, your firm’s GIPS policies and procedures document is used throughout the verification process to ensure that the policies and procedures are 1) adequate and 2) have been applied consistently across your firm. Your verifier will use your GIPS policies and procedures as the backbone for the entire project, and as a guide for how to test various aspects of your firm’s GIPS compliance.
The GIPS standards offer flexibility in many areas and, therefore, not all firms use the exact same calculation methodology, definition of discretion, timing for composite inclusion/exclusion, etc. Because of this, it is critical for the verifier to have a strong understanding of how these policies and procedures are applied at your firm.
If changes are made to composite policies, composite inclusion rules, or if a calculation methodology changed because of a conversion to a new portfolio accounting system, etc., it is essential that these changes are clearly recorded in the policies and procedures document before the verification begins. If the document is not kept up-to-date, the verifier will find inconsistencies between the policy documentation and the actual practices of your firm. This will stall the verification process.
List of Composites and/or Pooled Funds
If not already included in your GIPS policies and procedures, the verifier will request a current list of all active pooled funds and composites, including any composites that have terminated within the last five years.
This list commonly includes composite or pooled-fund-specific policies. This is an important piece of information to help the verifier understand what policies are applied to a given composite/pooled fund and ensure that they are selecting a meaningful sample.
Based on this list, a sample of composites/pooled funds will be selected for more detailed testing. This testing generally includes the recalculation of performance results presented in the corresponding GIPS Reports. The verifier will use the rules and methodologies outlined in the GIPS Report and composite definitions to gain confidence that the policies were consistently applied.
It is important that any new composites/pooled funds are added to this list and any that are terminated are labelled as such. Since this impacts the sample selection for the testing, the verifier needs to have a fully updated list to avoid having to modify samples and change testing procedures later in the process.
Portfolio and Composite Performance
Based on your firm’s list of composites and pooled funds, the verifier will select a sample to review in more detail. Often, verifiers focus on the main marketed composites, but they will also rotate through others to ensure all are being maintained as described in your GIPS policies and procedures.
For the selected composites, most verifiers will have you provide monthly portfolio-level market values and returns as well as monthly composite returns. With this information they will reconstruct the composites using the rules and calculation methodology described in your GIPS policies and procedures. As they do this, they will focus on the following:
- Can they use the portfolio-level data to calculate the same composite returns you provided by following the calculation methodology outlined in your GIPS policies and procedures?
- If a composite has a minimum asset level or significant cash flow policy, do they see portfolios in the composite breaking these rules?
- How does the dispersion look on a monthly basis? Is it consistent month to month or are there months with large spikes? What outlier performers are driving this dispersion?
The information gleaned from this composite reconstruction and review drives the sample selection for the next phase of testing. Specifically, portfolios appearing to break established rules as well as a sample of performance outliers will be selected for further testing. These testing items are discussed in detail in part three of this three-part series.
Because the results of this initial screen drives the sample selected for further verification testing, it is important that the data is free of errors and has been constructed in a manner that is consistent with your documented policies. To gain comfort, a review of all portfolios should be conducted prior to providing the data to the verifier – either on your own or with the help of a GIPS consultant. These checks should confirm that:
- Policies such as minimum asset levels and significant cash flows have been applied consistently and in line with how they are described in your GIPS policies and procedures.
- Outlier performers within the composite are not caused by material, client-driven restrictions as defined in your firm’s definition of discretion.
- Any portfolios added or removed from the composites during the period were done so in a manner consistent with the rules outlined in your GIPS policies and procedures.
- There are no portfolios currently excluded from the composite that should have been included based on your firm’s GIPS policies and procedures.
If you do not have a way to test this internally, we strongly encourage you to reach out to Longs Peak for outlier testing. We can save you the headache of multiple rounds of testing with your verifier.
Composite Membership Change List
The Composite Membership Change List should include all portfolios entering or exiting your composites during the period under review. This is generally listed by composite and provides the portfolio name or number that entered or exited and the date of the change.
This list allows the verifier to select a sample of portfolios and test whether they are entering/exiting the correct composite at the correct time, based on your firm’s policies and procedures.
While the verifier is selecting only a sample of composites and/or pooled funds, they will likely want to gain an understanding for composite membership changes across the entire firm. Again, although the focus is primarily on portfolios within the selected sample described earlier, they may broaden their sample for this testing item. This is most common when there are material changes for composites not originally selected for testing or if the sample composites selected did not have enough changes to meet the sample size requirements set for your firm’s verification.
Beyond selecting samples, the verifier will also compare the composite membership changes on the list to the data provided to ensure they are in sync. They will do this comparison to ensure that any noted membership change is reflected in the performance data.
For example, if the Membership Change List documents that portfolio ABC exited the composite at the end of the month, but this change is not reflected in the raw performance data, the verifier will likely come back with questions.
Assets Under Management Report
Verifiers generally want to see an Assets Under Management Report that breaks the assets out by portfolio and clearly labels each portfolio as discretionary or non-discretionary and, if discretionary, what composite the portfolio is included in.
The verification is conducted at the firm level and this report will give the verifier a clear picture of the full scope of the GIPS firm. Specifically, it will help the verifier:
- Gain comfort that the total firm assets reported in the GIPS Reports is accurate
- Assess what percentage of the firm assets are discretionary versus non-discretionary
- Confirm if there is any risk of double counting assets (usually caused by portfolios included in more than one composite or segregated portfolios investing in pooled funds managed by the firm)
- Ensure none of the assets included appear to be advisory-only or model assets
- Test that composite assets match the assets in the supporting information provided as well as what is reported in the firm’s GIPS Reports
- Compare the total AUM to regulatory filings (such as your ADV) to ensure any material differences are understood and align with how the firm is defined for GIPS purposes
The verifier will likely test some of the assets in this report by selecting a sample of portfolios and requesting that independent support for the valuation be provided (e.g., custodial statements). Since a sample of these values will be tested for consistency with the GIPS Reports, it is important that this document is clean, accurate, and presented in a manner that is easy for the verifier to understand.
List of Non-Discretionary Portfolios
If the AUM Report has non-discretionary portfolios clearly labelled then this separate list may not be needed. Either way, it is best if each non-discretionary portfolio listed includes an explanation for why it is deemed non-discretionary for GIPS purposes. Including comments about why the portfolios are non-discretionary will help the verifier understand why each portfolio is excluded from the composites, and help ensure the testing goes smoothly.
Verifiers will select a sample of these portfolios to ensure there is a valid reason for them to be non-discretionary and excluded from your composites. It is important that this list is accurate and up-to-date so the verifier can select appropriate samples and test portfolios without finding errors in classification.
GIPS Reports
GIPS Reports act as your firm’s external representation of your GIPS compliance. Since you are required to provide GIPS Reports to prospective clients, verifiers will test that the presented statistics can be supported and that all required disclosures are included. It is important to have a quality control process in place to check that all required statistics and disclosures are included prior to distributing the GIPS Reports to prospects or verifiers. This checklist can be used to aid in this review.
If not already provided as part of other testing requests, the verifier will likely require that you provide support for the statistics presented. This may include support for:
- Composite assets
- Number of portfolios
- Total firm assets
- Composite returns
- Benchmark returns
- Composite dispersion
- Composite external standard deviation
- Benchmark external standard deviation
- Percent bundled fee portfolios (if applicable)
- Percent non-fee-paying portfolios (if applicable)
- Any supplemental information presented (if applicable)
GIPS Report Distribution Log
The 2020 GIPS standards now require firms to demonstrate that they made every reasonable effort to provide GIPS Reports to their prospective clients. Additionally, verifiers are also required to test that the firms they verify have done this. Generally, this is achieved by documenting each distribution in a log that can be provided to the verifier. Some firms document this in their CRM while others log it in a spreadsheet (here's a sample). If doing this in a CRM, it is critical that a report can be exported to fulfill the request made by the verifier to confirm distribution. For more information on GIPS Report Distribution Logs, check out this article.
Marketing Materials
GIPS Reports are the only document that must be provided to prospective clients for GIPS purposes. However, your verifier is also likely to review your website and ask for a sample of other factsheets and pitchbooks – regardless of whether GIPS is mentioned in these materials. The purpose of this is to test that:
- Wherever GIPS is mentioned, all required disclosures accompany your claim of compliance
- The way you hold your firm out to the public is in sync with how your firm is defined for GIPS purposes
- Information presented is not false, misleading, or contradictory to what has been presented in your firm’s GIPS Reports
If no marketing materials are available outside of the GIPS Reports, that is perfectly fine. A simple confirmation of this scenario will suffice for the verification.
CFA Notification Form
All GIPS compliant firms are required to file a form with CFA Institute notifying them of their claim of compliance with the GIPS standards. This is completed once the firm is ready to claim compliance for the first time and then must be repeated prior to June 30th each year.
Verifiers are required to confirm that this has been completed as part of their verification. This is generally tested by saving the confirmation email provided when completing the notification form and providing a copy of this confirmation to the verifier when requested. So, save those emails!
Miscellaneous GIPS Data Requests
Outside of the primary initial requests we have already discussed, the verifier may have some other miscellaneous items included in their initial data request. Most of these items help the verifier better understand your firm or ensure changes to policies and/or GIPS Reports are captured in the documents provided. The following are some common miscellaneous items we see verifiers request.
Regulatory Correspondence – The verifier may ask if your firm has had any recent regulatory correspondence other than standard filings. If you have had an examination resulting in a deficiency letter, they will want to review this letter as well as your response. The purpose of this is to help the verifier assess the risk of the engagement and to help them tailor their testing to risk areas already identified. This is especially important if any deficiencies resulted from your firm’s GIPS compliance or the calculation and presentation of investment performance.
Changes to the Portfolio Accounting System – If changes have been made to system settings since the last verification, especially if they impact calculation methodology, composite membership, etc., the verifier will want to know about it. This will help them ensure their testing is in sync with your actual current practices, documented policies, and disclosures in your GIPS Reports.
Errors Since the Last Verification – Unfortunately errors happen and verifiers want to know about them. They are not looking to penalize you for having errors, but rather need to confirm that the appropriate action was taken to rectify the error if/when it occurs. It is important that when errors arise, your firm consistently follows your firm’s error correction policy. It is also helpful to maintain an error log. Maintaining an error log will help your firm document changes to your GIPS Reports resulting from errors and actions taken to address them. Providing this log to the verifier will help demonstrate that your error correction policy was consistently applied.
Incentive Fees – Verifiers often ask if incentive or performance-based-fees were charged to any portfolios during the verification period. GIPS requires net-of-fee returns to be reduced by incentive fees. Thus, if your firm charges incentive fees and actual fees are used to calculate performance, your verifier will want to confirm that net-of-fee returns have been reduced by the incentive fee.
If model fees are used, your verifier will test to ensure that the model fee is high enough to result in net-of-fee returns that are equal to or lower than what the results would have been if actual investment management fees (including any incentive fees) had been used. If no incentive fees were charged, then simply notifying the verifier that this is not applicable for your firm is sufficient.
Verifier Independence – While this might not be a “request,” your firm is required to gain an understanding of your verifier’s policies and procedures to ensure they remain independent throughout the course of the verification project. If your verifier does not provide you with a copy of their independence statement at the start of the verification, you should be proactive and request it. Save this document to support that your firm meets this requirement and is aware of the steps your verifier takes to ensure they remain independent.
Prioritizing What You Provide
In a perfect world, every initial document requested by the verifier is available and ready to provide in your first data submission. However, that is rarely the case. If everything is not available right away, the question becomes – what do you prioritize to make sure the verification progresses forward? If you have to send the initial request in stages, we recommend focusing on requests that allow the verifier to select their portfolio-level samples.
Depending on the size of your firm and composites, the portfolio-level testing phase of the verification can have many follow up requests and typically is the most time-consuming part of the verification. Therefore, it is best to get that phase of the verification kicked off as soon as possible. The items that allow a verifier to select their portfolio-level testing samples include:
- GIPS Policies and Procedures
- Portfolio and Composite-Level data
- Membership Change List
- Non-Discretionary Portfolio List
The remainder of the initial request documents can be provided as they become available. They will be needed to complete the verification, but the above listed documents should be the first priority to allow the verifier to select their portfolio-level samples.
Conclusion
The documentation provided for the initial request helps set the stage for the next round of testing. The cleaner and more organized the initial data, the better off you will be for the rest of the verification. Providing clean data in this sense means that you are confident performance data and disclosures are error free and outliers have been reviewed and deemed appropriate. If the verifier is able to move through these initial documents efficiently, it will set you up for success for the remainder of the project.
For more information on verification testing, check out part three of this three-part series where we dive into portfolio-level testing. We’ll cover the types of documentation requested and help you understand what your verifier is looking for. If you have any questions about GIPS or investment performance, reach out via our website, or contact matt@longspeakadvisory.com or sean@longspeakadvisory.com for more information.
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How to survive a GIPS verification Part 1: Setting up for success
This article is part one of a three-part series on how to survive a GIPS verification. In this series we will discuss how to structure a successful verification, the initial requests made during a verification, and follow-up sample testing. Part one focuses on the approach we have seen firms successfully implement to get through a verification.
Step 1: Find a committed project manager
Probably the single most important thing necessary to get through a verification is having someone on your team that is committed to seeing the project through to the end. Verified firms come in all shapes and sizes. Therefore, there is not a one-size-fits all approach to managing a GIPS verification that works for every firm. Individuals tasked with overseeing verification projects naturally have other responsibilities, so finding time to focus on the verification can be difficult. But finding the right individual to manage the project can make all the difference.
Step 2: Educate your employees & stakeholders on GIPS and the verification process
Regardless of the size of your firm—and since GIPS compliance is achieved at the firm level—you will likely need input from a variety of people to complete your verification. Small and mid-size firms may not need to create a specific GIPS project team, but should still prepare to obtain input from different departments as verifiers regularly request information that requires input from others.
Educating your team about the importance of your firm’s GIPS compliance/verification and explaining how they can or will contribute to this effort is crucial. Getting their buy-in can make or break your timeline, as disengaged individuals are slow to respond to requests for information. We recommend making sure you get everyone on board. If Longs Peak is helping manage your verification, we can put together a training and deliver it to your team.
Step 3: Build your GIPS verification team
For larger firms, it may make sense to create a GIPS project team to help divide and conquer. Again, GIPS is achieved at the firm level, and therefore it will typically require input from various departments, including: performance, operations, client services, and trading, to name a few. Ideally, you’ll want at least one individual that clearly understands how your organization operates, the various departments that may need to be involved and where to access the documentation required.
The most efficient verification teams get together to discuss verifier requests and develop a plan for how the information is gathered, who is responsible for each type of request and who is ultimately responsible for sending the information back to the verifier.
We find that teams who meet regularly and communicate frequently are most successful at sticking to the timeline. Having a designated project manager to act as the primary contact for the verification can simplify communication and ensure the requested information is organized. Ideally, this individual understands the fundamentals of GIPS – but don’t worry, if they don’t, Longs Peak can act as your GIPS guru. And, unlike your verifier, we’re not restricted by independence requirements so we can get as involved as you need.
Step 4: Create a verification project timeline
In our experience, most firms want their verification completed as soon as possible. Setting up a project timeline with specific milestones and clear deadlines will make this goal a reality. Verifications include numerous rounds of data requests to test different aspects of your firm’s GIPS policies and procedures. What’s great is you don’t have to do it yourself – your verifier or GIPS consultant can help you build out a timeline that works for your firm and will include all the critical objectives necessary. Check out this sample timeline to give you an idea of what’s typical.
When building out your timeline, the most important consideration is setting expectations for all parties involved and making sure they are on board with the project plan. Goals and deadlines are difficult, if not impossible to meet without communication. The firms that struggle the most are typically those that fail to transparently communicate expectations and receive buy-in for the project timeline from the start. Therefore, we strongly encourage you to involve all relevant parties (including your team, verifier and any third-party consultants) in setting project deadlines so everyone is aware of critical dates and milestones that need to be achieved.
Timelines should include goal dates for your firm as well as the verifier to hold everyone accountable to the ultimate goal: completing the verification. Tracking progress on the timeline will provide clarity on where the project is getting delayed and if the overall timeline is in jeopardy. Key stakeholders can use the timeline to evaluate the percentage of completion and can give your team a good sense of how close the project is to finish line.
Step 5: Set up recurring calls/meetings to stay on track
As simple as they are, setting up recurring meetings are a great tool to help keep the verification on track. These recurring calls can be internal to discuss the current requests and create action plans on collecting and delivering the needed data, or they can include your verifier to discuss progress, ask questions, and ensure they can correctly interpret the documentation provided. These meetings should have clear agendas to help the team stay on track with the timeline. Here’s a sample agenda we’ve used with our clients.
If nothing else, the recurring calls help build accountability – no one likes admitting they didn’t achieve what they agreed to since the prior meeting. The tighter the deadline, the more frequent these meetings should happen. These discussions can also be used to evaluate if you need to adjust the timeline from initial expectations.
Step 6: Organize data submissions
As mentioned, verifications typically have multiple rounds of requests for various types of testing (here’s a typical verification request for your perusal). Usually, the most efficient way to get through them is to submit everything from each request at once. This helps you stay organized by making sure all documents needed in a given round are provided. However, this is not always achievable and it may not be appropriate, especially in a time crunch or if just a handful of testing items are holding up the rest.
While potentially less desirable, a piecemeal approach at least keeps the sharing of documents moving and although some documents may still be pending, at least the items provided can be reviewed – getting your firm that much closer to the completion of the verification project.
If you are not able to submit everything from the data requests at once, we recommend approaching the verification requests either by the specific type of testing or type of document being requested. Approaching the verification in blocks of smaller requests will allow you to stay organized, reduce overwhelm, and keep the verification progressing. You can ask your verifier to organize their request in this format or if you work with Longs Peak, we can help you organize it in this fashion and help you get through the request at your own pace.
After data from the initial request is submitted to the verifier (details on initial data requests are discussed in more detail in part two of this three-part series) the verifier will then begin sending sample testing requests (the details of which are covered in part three of this three-part series). If this seems overwhelming, it doesn’t have to be. We literally started Longs Peak to make it easier for firms like yours get through this process.
If anything is not clear from a specific verification request or you are unsure if the documentation pulled is sufficient, give the verifier a call and talk through these issues. Open and ongoing communication will keep your verification on track – and help you avoid wasting time on something not needed.
Step 7: Schedule an onsite verification or extended virtual screenshare
One way to expedite the verification project (or to reignite a stalled project) is to conduct the verification onsite. Most GIPS verification firms are willing to travel to their client’s office to do on-site-testing. This is an efficient way to move through a verification as you will have the verifier’s undivided attention to specifically work through testing items and answer questions – plus, they might have your undivided attention too!
Even if an onsite is not feasible, setting up an extended virtual meeting with screensharing capabilities can help move through data with the verifier and address questions as they arise. Screenshare meetings will allow your team and the verifier to review documents together and talk through any questions on the spot. Feedback can be shared during these meetings to ensure what was provided is sufficient to complete a given testing request.
Conclusion
Regardless of your firm’s size or approach to the verification, ongoing communication between all parties involved is critical to efficiently get through a verification. Setting up a project plan and executing on that plan will help you get through the verification as quickly as possible. Seek help from your verifier as questions arise and if you still are struggling, reach out to an independent consultant like Longs Peak to help you get the project to the finish line.
At the end of the day, GIPS compliance is achieved at the firm level and will likely require contribution from a variety of individuals from your business. Getting buy-in from everyone involved is critical to making sure all parties are on board with the plan and understand the end goal.
For more information on data requests and verification testing, check out part two and three of this three-part series. You can email matt@longspeakadvisory.com or sean@longpseakadvisory.com with questions or reach out to us if you need help getting through your verification project.


