Wednesday, December 30, 2009

Performance & ethics

Calculating rates of return really isn't that difficult. And while we may debate whether returns should be calculated using money-weighting or time-weighting, such issues pale in comparison with the broader aspect of ethics.

I must confess that I initially thought that the Certificate in Investment Performance Measurement (CIPM) Program's emphasis on ethics seemed a bit excessive. And perhaps the exam questions could be geared more to the issues and situations that performance analysts and performance heads are more likely to encounter. But the issue of ethics shouldn't be ignored. We seem to be reminded of this on a fairly regular basis.

Yesterday's Wall Street Journal has an article on Raj Rajaratnam and his Galleon hedge fund. Recall that Mr. Rajaratnam has been accused of trading on inside information. His prowess at building relationships, which allegedly resulted in him gaining access to confidential information, allowed him to build a successful business and amass a fortune of more than a billion dollars.

Galleon's returns were apparently quite impressive. And one might not find any fault with the accuracy of the valuations or the return methodology employed. But what is the value of the returns if, as has been suggested, they reflect the results of illegal activity?

What is the responsibility of the performance analyst or manager, should they have reason to believe that the returns reflect illicit activity? Perhaps questions like these should be added to the CIPM program. What would YOU do, if you had reason to believe that the firm's results were arrived at through illegal means? Something to ponder, yes? 

p.s.,We are investigating another fraud case which might involve a firm that claimed compliance with the Global Investment Performance Standards (GIPS(R)). We will provide details once we've done further vetting of the information we've seen so far.


  1. Dave, do you know what the CIPM curriculum would recommend in this case? I wonder if there's a sample case in its curriculum that's similar.

  2. I took the exam in 2006 and so don't know if it's been upgraded to specifically address performance issues. I'll ask John Simpson, who teaches our CIPM study classes, to comment.

  3. It is my understanding that the "Ethics" component of the CIPM curriculum is essentially the same as the "Ethics" component of the CFA curriculum. CIPM certificants must master (and, of course, agree to abide by) the CIPM "Code of Ethics" and the "Standards of Professional Conduct" - which match those followed by CFA charterholders once you replace "CFA" with "CIPM" appropriately.

    It would generally be at the Expert Level in the CIPM examination process that candidates would be responsible for interpreting the "Code" and "Standards", and applying them in specific scenarios. I have not noticed any scenarios along the lines of what Dave describes above. I believe the various instances of actual and potential fraud that we have been reading about over the past couple of years provide an excellent educational opportunity to the curriculum and exam question writers for both the CFA and CIPM programs.

    FWIW, I agree with the concept of consistency between the Ethics components of both programs (CFA & CIPM), but perhaps a greater focus on interpreting scenarios a performance analyst is likely to face would be appropriate (and perhaps this has been factored into the CIPM curriculum).

  4. In the case of Galleon, it would seem likely that at least one associate at the firm would have had a CFA Charter. In that case, the associated is obligated to report ethical misconduct as part of their charter requirements. I suspect, though, that this is a very rare event. I have never seen it happen and advancing the ethical features of the CFA designation or the CIPM will probably not increase associates' willingness to blow the whistle.

  5. Failing to report can, I believe, result in the loss of the charter (or certificate). Given the cost in time and value of having these designations, individuals should consider strongly the impact of standing by quietly.


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