I am preparing to meet with a hedge fund client who wants to comply with GIPS(R) (Global Investment Performance Standards). As part of this preparation I am revisiting the recently published Guidance Statement on Alternative Investment Strategies and Structures.
This guidance makes it clear from the start that what is set forth within it applies to all asset classes.
When the GS was being discussed by the GIPS Executive Committee, I inquired into one particular section:
This essentially gives firms the opportunity to use stale prices, if those prices are deemed "the best estimate of the current fair value of the investment."
I asked (in order to confirm) whether this could be applied to fixed income securities, for example, and was told "yes."
This is a HUGE change. I recall individuals at the annual GIPS, conference around the time the 2010 edition was introduced, asking about the need to revalue for large cash flows, when their portfolio might contain less liquid securities (e.g., municipal bonds) that do not price daily. While I don't recall the specific response, I do not believe it was what is stated here.
If a GIPS compliant manager who has such assets finds that they may need to use historical prices, they need to document this in their valuation policy and indicate that they do so when they believe it's the "best estimate of the current fair value of the investment." Alternatives, such as the use of matrix pricing, can also be used, but it's good to know that firms can also use historical prices.