GIPS 2020: The push for compliance by alternative asset managers

The CFA Institute released its updated 2020 GIPS Standards on June 2020, which outlined several items aimed at alternative asset and pooled fund managers.

“It’s really going to help a lot, especially in alternative asset classes” said Michael Caccese, chairman of the management committee and financial services practice area leader at K&L Gates and co-author of GIPS at a panel on the updated guidelines last week. “One of the main focuses [in the new guidelines] was pooled funds and alternative asset classes”.

There is increased pressure for LPs to require GIPS compliance, although this has not translated into full adoption.

Composites
These have served as the foundation to much of the 2010 GIPS standards, but are not always appropriate for private funds and similar vehicles. Fund managers and GP’s have cited composite structure as a main deterrent from GIPS compliance, and although they will continue to be required, the addition of broad distribution pooled funds and limited distribution pooled funds makes it possible for firms to present either a GIPS pooled fund report or a GIPS composite report to limited distribution pooled fund prospects.

Carve-outs
In relation to carve-outs, the 2020 standards allow for the option of carve-out strategies within a firm’s composite. An additional provision for pooled-fund managers not offered in the 2010 standards is the option of linking the performance of an acquired firm or investment team to performance at the new firm. Basically, the firm is no longer required to ensure pre-acquisition performance is compliant within one year of an acquisition.

Money weighted returns
Money weighted returns also change significantly under the 2020 standards, as they permit more frequent use of MWR as compared to time-weighted returns. Additionally, MWR are permitted under the new guidelines only if the manager controls external cashflows and if a significant part of the investment strategy is in illiquid investments, or contains closed end, fixed life or fixed commitments.

Valuations

The updated standards uphold different valuation requirements to accommodate the different market practices of real estate versus private equity investments. Although the new standards do require real estate investments to receive an external, independent valuation at least once every 12 months unless client agreements stipulate otherwise, they do not require other private market investments to obtain external, independent valuations.

“And for verification,” continued Caccese “you’re going to have to engage in more conversations with your verifiers in the GIPS 2020”.

Although this seems like a safe way to lure alternative asset managers into GIPS compliance, there are still obvious gray areas in the 2020 guidelines that make full adoption far from certain. “For a set of standards that was designed to mitigate cherry picking, it would really surprise me if they let you pick and choose which standards to follow, but I guess we’ll see” remarked Michael McGrath, CFA and partner at K&L Gates, and co-panelist at Thursday’s event.