Wednesday, January 13, 2010

Side pockets & GIPS

The Global Investment Performance Standards (GIPS(R)) don't currently have any rules or guidance specifically geared to the world of hedge funds, which seems a pity. Some think that "everything you need to know is already there," but I don't. Take side pockets, for example.

Side pockets are often employed to move less liquid assets away from the main part of the fund. Investors are typically given an option as to whether or not they want to invest in the side pockets. How should these be handled from a GIPS perspective?

My recommendation: your composite should (a) have the return of the total fund (with the side pocket), (b) provide the return of the fund without the side pocket, and (c) optionally show the return of the side pocket, too.

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