Alternative Investment Funds Services ICAI CPE Study Circle GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS) 1

Mission Promote ethics and integrity and instill trust through the use of the Global Investment Performance Standards by achieving universal demand for compliance by asset owners, adoption by asset managers, and support from regulators for the ultimate benefit of the global investment community. 2

Objectives of the GIPS Standards 3

Introduction & the need to comply with GIPS The need for a practitioner-driven, standardized, industry- wide approach to calculating and reporting investment results, based on ethical principles, led the Association of Investment Management Research (AIMR®), now known as CFA Institute, to sponsor, develop, and publish performance standards by which firms could calculate and present their investment results. The GIPS standards are a voluntary set of standards based on the fundamental principles of full disclosure and fair representation of performance results. Investment management firms that comply with the GIPS standards allow clients, prospective clients, and consultants the best opportunity to fairly evaluate their past performance. Compliance also enables firms to fairly compete against other firms throughout the world. 4

Provisions of GIPS Standards 0.Fundamentals of Compliance 1.Input Data 2.Calculation Methodology 3.Composite Construction 4.Disclosure 5.Presentation and Reporting 6.Real Estate 7.Private Equity 8.Wrap Fee/Separately Managed Accounts (SMA) Portfolios 5

Evolutionary Approach of the GIPS Standards 1.Extending the scope of the GIPS standards to adequately address: – Additional investment vehicles and strategies (e.g., private equity, hedge funds) – Technical areas (e.g., fees, derivatives) 2.Evolving the Standards: –By providing on-going guidance and interpretations –By reviewing the entire contents of the GIPS standards periodically (2010, 2015, etc.) 3.Endorsing translations of the GIPS standards and partnering with GIPS Country Sponsors 6

Current Guidance Statements Error Correction Performance Examinations Record Keeping Calculation Methodology Composite Definition Definition of Firm Performance Record Portability Treatment of Carve-Outs Treatment of Significant Cash Flows Use of Supplemental Information Verification Country-Specific Taxation Issues Verifier Independence Wrap Fee/Separately Managed Account Fees Provisions Private Equity Real Estate Impact of Euro Conversion 7

Important Concepts  Total Firm Assets Defined as all discretionary and non-discretionary assets for which a firm has investment management responsibility. Includes assets assigned to a sub-advisor if the firm has discretion over selection. 8  Discretion Discretion is the ability of a firm to implement its intended strategy. To have discretion over assets, firms must either –  Manage the assets internally AND/OR  Be able to hire and fire the external investment manager

Calculation Methodology for Portfolios The following are guiding principles that firms must use when calculating portfolio returns: All returns must be calculated after the deduction of the actual trading expenses incurred during the period. Firms must not use estimated trading expenses. Total returns must be used. Total return is defined as the rate of the return that includes the realized and unrealized gains and losses plus income for the measurement period. The calculation method chosen must represent returns fairly, must not be misleading, and must be applied consistently. Firms must calculate time-weighted rates of return that adjust for external cash flows. External cash flow is defined as capital (cash or investments) that enters or exits a portfolio and is generally client driven. Income earned on a portfolio’s investments is not considered an external cash flow unless it is paid out of the portfolio. 9

Important Concepts  TWR vs. MWR  Firm must report time-weighted rates of return (TWR) TWR = Firm’s performance  Investor may find money-weighted rates of return (MWR) to be useful MWR = firm’s performance + cash flows 10  Gross-of-fees vs. Net-of-fees Gross-of-fees returns = return - transaction costs Net-of-fees returns = return - transaction costs - investment management fees

Time-Weighted Rate of Return Valuing the portfolio and calculating interim returns each time there is an external cash flow results in the most accurate method to calculate the time-weighted rates of return. The formula for calculating the time-weighted portfolio return when there are no external cash flows is: 11

Time-Weighted Rate of Return (Continued) When a portfolio experiences external cash flows during a period, the most accurate return is calculated by valuing the portfolio at the time of the external cash flow, calculating the time-weighted return for each sub- period (defined as the period between external cash flows), and then geometrically linking the sub-period returns using the following formula: 12

Approximation of Time-Weighted Rate of Return 13

Approximation of Time-Weighted Rate of Return (Continued) 14

Composite Return Calculation 15 The GIPS standards require that composite returns must be calculated by asset weighting the individual portfolio returns using beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows. The intention is to show a composite return that reflects the overall return of the set of the portfolios included in the composite. To calculate composite returns, firms may use alternative formulas so long as the calculation method chosen represents returns fairly, is not misleading, and is applied consistently.

Composite Return Calculation (Continued) 16

Composite Return Calculation (Continued) 17

Composite Return Calculation (Continued) 18

GIPS Governance Structure 19

Status of GIPS Adoption 20

Current Translations of the GIPS Standards 21

Who Benefits from the GIPS standards? Investors – Plan sponsors – High-net-worth investors – Retail investors Investment Managers – Including equity, fixed income, hedge fund, private equity, and real estate investment management firms Intermediaries – Consultants 22

Benefits of an Industry created Performance Standard For Prospective Investors {Enhanced prospective client confidence}: Consistent, informative presentations with meaningful disclosures and Transparency Trust and confidence and viewed as the norm Ethical commitment - ‘best practice’ professionalism Consistent input data and calculations that allow for comparisons among products and firms Availability of a firm’s performance-related policies and procedures For Firms: Global passport - A single standard for presenting a firm’s historical investment returns around the globe Self regulation Enhance internal controls and Risk Management Recognized Industry Best Practice Consistent investment manager reporting by way of transparent and consistent approach to reporting and presenting performance to prospective clients, which should also benefit existing clients and the performance information that they receive 23

Benefits of an Industry created Performance Standard (Continued) Assurance to regulators Evidence of commitment to self-regulation and best practices that complement legal and regulatory requirements Documented policies and procedures supporting the claim of compliance Improved investment manager internal controls Strong control framework with comprehensive policies and procedures Reduced risk of error and restatement Potential driver for a firm to continually assess its technology infrastructure Increased confidence that performance is fully disclosed and fairly presented 24

QUIZ TIME – POLL # 1 Question: What is a benefit of having access to general information from GIPS compliant firms? a. Better allocation of resources dedicated for the GIPS standards b. Transparency for investors c. Higher visibility for GIPS compliant firms d. All of the Above 25

QUIZ TIME – POLL # 1 ANSWER:- Option D 26

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RESOURCES 28

THANK YOU 29