GIPS Guidance on Alternative Investment. How Traditional Investment

Size: px

Start display at page:

Download "GIPS Guidance on Alternative Investment. How Traditional Investment"

Basil Perkins
6 years ago
Views:

1 GIPS Guidance on Alternative Investment Strategies: How Traditional Investment Managers Can Also Benefit 16 January 2013 Dimitri Senik, CFA Member of the GIPS Executive Committee

Guidance Statements CVGs GIPS New GIPS Governance New presentation and disclosure

2 GIPS evolution GIPS 1999 GIPS 2005 GIPS 2010 GIPS 2015? GIPS GIPS GIPS PwC 2 Private Equity Real Estate Advertising Guidance Statements CVGs GIPS New GIPS Governance New presentation and disclosure requirements Valuation principles Revision of PE and RE guidance Alternative Strategies Overlay strategies Risk measures Pooled funds Plan sponsors?

3 CFA Institute GIPS conference survey 78% of firms that manage hedge funds include hedge funds in their GIPS defined firm 90% of firms agree that GIPS compliance is effectively a must have requirement of institutional investors when selecting an asset manager. However, only 56% think this is the same for alternative investments managers Source: Results of Audience Response Polling at the GIPS Standards Annual Conference of CFA Institute, 20 September 2012 PwC 3

4 Need for a specific GIPS Guidance for Alternatives Dispel the perception that GIPS are not applicable to alternative investments, such as hedge funds Combat ambiguous/questionable performance presentation practices Promote transparency: Investors and regulators calling for increased performance detail and disclosure Address increasingly complex instruments and strategies Address technical peculiarities not explicitly covered by the current GIPS which require a great deal of interperation and judgement PwC 4

5 Scope and applicability of the AIS Guidance Although the Guidance focuses on alternative asset classes and strategies (such as hedge-fund like strategies), in many instances it also provides useful guidance to traditional asset classes and strategies Private Equity and Real Estate asset classes have their own related guidance within GIPS and are not in the scope of the AIS Guidance All firms must consider the AIS Guidance, even those that may not consider themselves alternative investment managers Effective from 1 October 2012 PwC 5

6 Key matters addressed in the AIS Guidance Valuation issues (e.g. frequency of valuations, use of estimate values, illiquid investments) Composite construction and performance calculation for complex fund-offund and multi-layer structures Treatment of side pockets for performance presentation purposes Elimination of double-counting of assets Various performance calculation matters: Performance consolidation of multiple share classes with currency hedging Performance calculation for portfolios leveraged with derivatives Treatment of fees Selection of appropriate benchmarks Presentation of investment risk Transparency and disclosures PwC 6

7 Some new useful provisions: Valuation of investments GIPS require that, in absence of external cash flows, portfolios must be valued at least on a monthly basis Traditional portfolios may also invest in assets that do not lend themselves to the monthly valuation The AIS Guidance introduces a possibility to opt out of the monthly valuation requirements for those investments that do not lend themselves to the monthly valuation. The subscription and redemption cycle of the investment vehicle would drive the choice of the periodicity of valuation. Firms may use estimated values or last available historical values as long as they are considered the best estimate of the current fair value and satisfy the firm s GIPS Fair Value policy Firms should assess deviations between the final value (obtained later) and estimated value (used as fair value) that rise to the level of materiality and would be considered an obvious error. In that instance, it would become subject to the Error Correction policy. PwC 7

8 Some new useful provisions: Trade-date accounting clarification GIPS require use of Trade Date accounting (or max. T+3) Traditional portfolios may invest in alternative funds. Subscription/redemption transactions with such funds often cannot be recognized on the trade date (or T+3) because the fund administrator s confirmation with the final settlement quantity and price may be provided only several days/weeks after the subscription/redemption trading order was submitted. Firms should differentiate between the date of placing a subscription/redemption order and the date of the effective asset ownership transfer. The date of the trade execution or transfer of ownership (i.e. when the definitive quantity and settlement price of the asset being purchased/sold is determined and becomes known) should be considered the trade date. PwC 8

9 Some new useful provisions: Gross returns of fund-of-funds Traditional managers may also manage portfolios/funds investing in other funds. In general, if presenting the gross-of-fees returns for a fund-of-funds composite, firms must present the gross-of-fees returns net of all of the underlying funds fees and expenses. AIS Guidance introduces an option to treat management fees of the underlying funds gross if they are managed by the same firm and if management fee model is structured in a way that it is split and charged both at the fund-of-funds and the underlying funds level (e.g., 20% at the fund-of-funds level and 80% at the underlying fund level) or only at the underlying funds level. PwC 9

10 Some new useful provisions: Using model fees for net-of-fees returns GIPS provide that, when calculating net-of-fees returns, a firm may calculate gross-of-fees returns and deduct a model fee, which must be the highest management fee incurred by portfolios in the composite AIS Guidance introduces a new option to use the highest model fee applicable to the specific prospective client or the intended recipient of the GIPS presentation as long as doing so results in the net-of-fees returns that are no higher than those that would have been calculated if actual fees had been used. This option is especially useful if a combination of fixed and performance-based management fees is used and it is impossible to determine which management fee is the highest among all portfolios within a composite. PwC 10

11 Some new useful provisions: Hedged share classes of pooled funds Traditional managers may manage funds with shared classes in different reference currencies (that accommodate needs of particular local investors) that are hedged in the fund s base currency. Returns of the fund s share classes expressed in different reference currencies but hedged in the fund s base currency cannot be simply combined in order to calculate the total fund (composite) return. Allowed options introduced by the AIS Guidance: Treat every hedged share class as a separate strategy (composite) Convert the returns for all share classes into the fund (composite) reference currency, or Use the return of the share class that has the same reference currency as the composite as a proxy for the return of the total fund (the composite assets must still include the assets of all share classes). PwC 11

12 Some new useful provisions: Hedged share classes of pooled funds: Illustration Share class Assets, USD m Return USD, unhedged % EUR, hedged in USD % CHF, hedged in USD % Cannot use for the total composite return: Composite R USD = 60% 2.5% + 30% 2.3% + 10% 2.4% Can use: Composite R USD = 2.5%; Composite assets = USD m Can create separate composites for each hedged share class PwC 12

13 Outlook: Guidance on Overlay Assets/Strategies GIPS currently offer insufficient guidance on overlay strategies. Overlay strategies present a number of challenges, such as: Calculation of the composite and firm assets: Should only the effective market value of the overlay portfolios be used, or the managed underlying exposure? Composite construction: How should overlay portfolios be grouped in composites? Performance calculation: What should be the capital basis for the overlay return calculation? A dedicated working group will be created in January 2013 to work on the new guidance. PwC 13

14 GIPS strategic priorities: Current technical projects Project Revision of the GIPS Standards Handbook Status The new Handbook was published in Dec 2012: Risk guidance Exposure draft is expected in Q Update of the GIPS Guidance on supplemental information Exposure draft is expected in Q Update of the GIPS Guidance Exposure draft is expected in Q on performance portability Verifier oversight and code of conduct Guidance for pooled funds and retail products Discussion in progress The working group has been formed and the work is about to commence Guidance for pension funds Exposure draft is expected in Q Guidance on overlay strategies See page 13 PwC 14

15 Your contact: Dimitri Senik, CFA PricewaterhouseCoopers Birchstrasse 160 CH-8050 Zurich Switzerland Tel.: dimitri.senik@ch.pwc.com Internet: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Trends and Issues in Client Investment Reporting

Trends and Issues in Client Investment Reporting GIPS seminar of the Swiss Bankers Association Zurich, 15 Dimitri Senik Content Trends and issues in the client investment reporting area Self-regulation