Originally designed to standardize performance reporting for individual separately managed accounts, the Global Investment Performance Standards (GIPS® standards) have evolved over time to accommodate the complexities of pooled funds – encompassing mutual funds, hedge funds, and other collective investment vehicles where ownership interests may be held by more than one investor. The GIPS standards provide a framework for the classification of pooled funds, each with distinct reporting requirements and regulatory considerations. Understanding this framework is essential for investment managers aiming to provide accurate and standardized performance information to prospective clients and investors.
The GIPS standards separate pooled funds into two categories:
- Broad Distribution Pooled Funds (BDPFs)
- Limited Distribution Pooled Funds (LDPFs)
BDPFs are defined as pooled funds that are regulated under a framework that would permit the general public to purchase or hold the pooled fund’s shares and are not exclusively offered in one-on-one presentations (e.g., mutual funds, exchange traded funds). If any series or class of the pooled fund is sold on an exchange or is otherwise available for investment without contacting the firm, then the fund is considered a BDPF.
LDPFs are defined as any pooled fund that is not a broad distribution pooled fund (e.g., hedge funds, CITs). If the fund is only offered through direct sales with investors and/or investors enter into an agreement directly with the firm, then the fund is considered an LDPF. Additionally, pooled funds are considered LDPFs that are regulated under a framework that would permit the general public to purchase or hold shares, but where the firm has chosen to offer institutional share classes only and all share classes are sold exclusively in one-on-one presentations.
Portfolios that are not pooled funds are considered segregated accounts. They are defined as any portfolio owned by a single client, which may be a separate account or a fund-of-one.
Pooled funds are not required to be included in composites unless:
- the strategy is managed for or offered as a segregated account, or
- the pooled fund meets the definition of any existing composite.
Regardless of whether an LDPF is included in a composite, firms that adhere to the GIPS standards must provide a GIPS Report to all prospective LDPF investors. A prospective investor is defined as any prospect or entity that has expressed an interest in one of the firm’s pooled funds and qualifies to invest in the pooled fund. As a result, the firm will need to either:
- create GIPS Pooled Fund Reports specific to each LDPF that is actively marketed, or
- include each LDPF that is actively marketed in a composite and produce GIPS Composite Reports for each of those composites.
There are different requirements for providing GIPS Reports to prospective investors depending on if a prospect is interested in a BDPF or an LDPF.
- Firms must provide a GIPS Report to all prospective investors in LDPFs.
- However, firms have the option of presenting either a GIPS Pooled Fund Report or a GIPS Composite Report for the composite that the pooled fund is included in.
- Firms are not required but have the option to provide GIPS Reports to prospective investors in BDPFs.
- The GIPS standards have drafted specific guidance for firms that manage only BDPFs and elect not to create any GIPS Reports. Since, historically, firms have been allowed to claim compliance with the GIPS standards in only two places (in a GIPS Report or in a GIPS Advertisement), it was necessary to outline how a firm that only manages BDPFs and does not create GIPS Reports or GIPS Advertisements may reference their claim of compliance when reporting to a consultant database or responding to an RFP using a modified compliance statement. For more information on the Guidance Statement on Firms Managing Only Broad Distribution Pooled Funds, click here.
In conclusion, the evolution of the GIPS standards to encompass pooled funds reflects a commitment to providing transparent and standardized performance information across diverse investment vehicles. Whether through specific GIPS Pooled Fund Reports or GIPS Composite Reports, adherence to these requirements ensures that prospective investors receive reliable data, fostering trust and transparency in the financial industry. By embracing these guidelines, firms not only enhance their credibility but also contribute to a more informed investment landscape globally.
GIPS® is a registered trademark of CFA Institute.
