New Hedge Fund Compliance Guideliness

April 18, 2011

Global Investment Performance Standards or “GIPS” is a set of compliance guidelines published by the CFA Institute that governs things like performance, AUM and NAV reporting by asset managers. 

But many hedge fund managers say that GIPS falls short on adequately addressing the issues faced by hedge funds, according to a recent article in AllAboutAlpha. As a result, the GIPS Executive Committee has proposed a set of new rules and is asking for industry feedback.

The new rules allegedly address such hot button topics for hedge funds as leverage, master-feeder relationships, benchmarks and performance fees. But others in the industry claim these issues have been adequately addressed by the old set of rules. As the AAA article points out, “Long/short funds aren’t really that different from long-only funds and many unique aspects of alternative investments, such as their relative illiquidity, were covered by previous GIPS standards.”

However, one area that was not as well covered by the previous GIPS guidelines is hedge Fund of Funds. The new proposals cover situations where a fund of fund needs to estimate its own value since the value of underlying funds can take weeks to be reported. The new guidelines suggest that these FoFs can either wait until they have the final NAVs from their underlying managers, or speak directly to the fund administrators to confirm their estimates.

Another hot topic is the use of “side pockets,” a type of account used by hedge funds to separate illiquid assets from other more liquid investments. Many hedge funds faced a liquidity crunch during the recent financial crisis and used side pockets to isolate some of their investments. Now, under the new proposed guidelines, hedge funds have to report the returns of side pocket investments to potential new investors in the main fund, even if these investors would be precluded from the side pocket if they invested. This could potentially affect hedge fund marketing efforts in attracting new investors.

The financial crisis and the Madoff scandal created a more fertile environment for a globally accepted universal investment performance reporting standard. The aim is to make investors’ lives easier, and to ensure that it is possible to compare funds on a fair basis. Although GIPS has not been universally accepted by the hedge fund industry, if more large-scale investors began asking for GIPS criteria, hedge funds would be under greater pressure to adopt these measures. You can learn more about GIPS standards at www.gipstandards.org

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