Global Investment Performance Standards Facilitate Reliable, Apples-to-Apples Comparisons by Hedge Fund Investors, and Offer Marketing Opportunities for Hedge Fund Managers

Various factors – including the closing of investment bank proprietary trading desks and layoffs at hedge fund managers – have contributed to a quickening pace of hedge fund entrepreneurship.  See “What Is Proprietary Trading, and Why Does Its Definition Matter to Hedge Fund Managers?,” Hedge Fund Law Report, Vol. 3, No. 8 (Feb. 25, 2010).  At the same time, a noteworthy proportion of the assets that redeemed from hedge funds over the past two years are looking to return, along with new assets.  In short, both the supply of hedge fund management options and the demand for such management by institutional investors are increasing.  As a swelling pool of assets evaluates a growing number of managers, performance remains one of the key determinants of where assets get allocated.  See “How Can Start-Up Hedge Fund Managers Use Past Performance Information to Market New Funds?,” Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).  (Performance used to be the key determinant of allocations, now it is merely primus inter pares; transparency and liquidity also loom large.  See “Hedge Funds Using 3WayNAV to Enhance Visibility into Portfolio Liquidity,” Hedge Fund Law Report, Vol. 3, No. 2 (Jan. 13, 2010); “Rolling Lock-Up Periods Enable Hedge Fund Managers to Pursue Less Liquid Strategies While Managing Investors’ Liquidity Expectations,” Hedge Fund Law Report, Vol. 3, No. 2 (Jan. 13, 2010).)  For hedge fund managers in this environment, the reliability, comparability and utility of performance data are, collectively, as important as the levels of performance.  That is, investors want to know that the numbers are accurate; they want to be able to compare them to numbers from other funds following the same strategy, funds following different strategies and funds organized in different jurisdictions; and they want to be able to plug the numbers into their own models and perform analytics.  The Global Investment Performance Standards (GIPS standards), promulgated by the CFA Institute, facilitate these three values – reliability, comparability and utility.  The GIPS standards are legally voluntary but, increasingly, practically required guidelines establishing a consistent method for presentation by investment advisers of performance and valuation data.  While not designed specifically with hedge fund managers in mind, hedge fund managers are increasingly adopting the guidelines, retaining third parties to verify their adoption and using their adoption offensively in marketing to institutional investors.  To assist hedge fund managers in determining whether the benefits of compliance with the GIPS standards outweigh the burdens, this article details: what the GIPS standards are; their specific application to hedge fund managers; recent revisions of the GIPS standards; interaction of the GIPS standards with conflicting country or state laws; specific steps required to become compliant; the third party verification regime; the benefits and burdens to hedge fund managers of compliance; and practical strategies for mitigating the burdens.

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