I have read through the new GIPS(R) (Global Investment Performance Standards) Alternative Investments Guidance Statement a few times, and frequently make what I think are interesting discoveries. Here’s just one:
I have highlighted the part I find of interest (I hope it’s readable). We see “firms may wish to present simulated, model, or back-tested hypothetical performance results due to the lack of an actual historical track record.” [emphasis added] This further adds credibility to my prior suggestions that the Standards permit the use of non-real performance, which is, I think, quite a good thing. And so, for example, if a firm has a new strategy for which they only have simulated, model, or back-tested performance, they can use it (along with a disclosure that makes it evident that this isn’t a real track record (i.e., against managed assets)).
However, when we continue to read we find that these same results “can be presented as Supplemental Information to a compliant presentation.” [emphasis added] What compliant presentation?
I think this is where it can get interesting, and even confusing, but it shouldn’t be.
First, we see the word “can,” which isn’t the same as “must.” And so, in the absence of a track record for a strategy, a firm can use hypothetical results.
When would the “can” apply?
In a couple cases.
First, even though this sentence is in the same paragraph as the wording dealing with the absence of a track record, the hypothetical performance can be used even if there is a track record, to demonstrate performance for periods not covered by the real investments.
Second, just because a firm doesn’t have a track record it can still have a presentation; I have long been an advocate of this. The firm would have all the necessary disclosures, but no performance. The performance would be the supplemental hypothetical.
We also see the same language that appears in the Supplemental Information guidance statement: that you can’t link hypothetical and actual performance. By “link” we don’t mean “geometrical linking,” though this would also hold true, but rather “visual” linking, where by presenting hypothetical and actual on the same page, the reader might mistakenly think they’re one and the same (i.e., actual for the full period). And so, to avoid the potential confusion, you’re required to have them on separate pages.
I’ll have more to say about this GS in future posts.