Friday, February 26, 2010

Fund of fund managers

In my response to the Global Investment Performance Standards (GIPS(R)) 2010 edition disclosure draft, I suggested that guidance be provided for fund-of-fund (FOF) managers. The standards clearly apply to such managers, but there weren't any details offered.

The GIPS Executive Committee (EC) listened (perhaps not actually to me, but at least to someone) and included a provision: however, it is limited to FOF managers in the private equity space. Clearly, guidance was needed, but its scope is somewhat limited. Perhaps more will be added in the future. Given the time constraints the EC faced, one can understand why not much more was addressed at this time. I would suggest they tackled one of the more significant areas.

Here's the scenario: we have a private equity FOF manager: what returns do they report for their claim of compliance? Since the FOF manager doesn't control the flows, one might think time-weighted returns apply; however, in the world of private equity, since inception IRR rules. The answer: SI-IRR (see paragraph 7.A.22 for further clarity). Bravo!


  1. The idea of a "Fund of Funds" manager in this context is focused on someone who offers a product that is comprised of other products. The most publicized versions of these "fund of funds" products are currently found in hedge funds and private equity. However, such fund of funds products have also existed for decades in the form of balanced funds. There is really no reason to make distinctions here in terms of GIPS compliance or any other form of performance reporting and analysis. That said, in this context of fund of funds, the underlying funds become comparable to the so-called "allocation" and "selection" components that are used to describe a manager's active process. And, it's common to see attribution for fund of fund managers presented in this familiar context. But what about those underlying fund returns? I think that since inception IRR is the best way to address the issue with consistency and clarity - both for the underlying funds and for the fund of funds. Once again, the fundamental principle that performance should describe the results of the investment process provides the right guidance: when you control the cashflows, then these cashflows are a critical part of the investment process and they must be part of the performance calculations.

  2. The challenge for FoF managers who wished to comply with GIPS is the absence of any clarity as to what they need to do. The inclusion of this wording helps but more is needed. As I noted above, I would hope we will see more in the next release.


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