Institutional Investors Ought to Endorse Obligation for Adhering to GIPS Standards Regulations
In the world of finance, transparency and standardization are key to building trust and fostering informed decision-making. This is particularly true for hedge funds, where complex fee structures and performance reporting methods have traditionally been a source of scrutiny. Enter the Global Investment Performance Standards (GIPS), a set of guidelines that aim to promote full disclosure and transparency in investment performance reporting.
As of 2025, the 2020 GIPS Standards have been fully adopted by firms presenting performance data that includes periods after December 31, 2020. Compliance with these updated standards is required for all firms and asset owners claiming adherence to GIPS[1]. Although specific adoption rates among hedge funds are not explicitly detailed, the 2020 updates include tailored provisions for firms competing for business and managing external money, which would cover many hedge funds seeking transparency and standardization in performance reporting[1].
One of the most significant aspects of the 2020 GIPS Standards is the emphasis on transparency in net-of-fee returns. This transparency provides a realistic and fair reflection of the actual returns received by investors after all fees and expenses are deducted. For hedge funds, where fee structures can be complex and performance fees significant, transparent net-of-fee reporting allows investors to accurately assess fund performance on a comparable basis.
Transparent net-of-fee reporting also enables investors to understand the true value generated relative to the risks and fees paid. This enhanced transparency helps foster trust and credibility between investors and fund managers. Moreover, it ensures compliance with regulatory and industry standards that increasingly demand clear disclosures of actual returns experienced by clients.
The GIPS Standards require firms that report net-of-fee returns to include the weighted-average fee. This provision ensures that investors have a complete understanding of the fees associated with their investments. Without this transparency, the value of the net-of-fee returns is limited.
The 2020 GIPS Standards are not just a recommendation but a requirement for any performance reports including periods from the end of 2020 onwards. Firms do not have to comply with the 2020 GIPS changes until they begin to report their 31 December 2020 results.
The adoption of the 2020 GIPS Standards by hedge funds is not just a response to a few institutional investors but a market-driven demand. Hedge funds will adopt the 2020 GIPS Standards when the market demands it, not just from a few institutional investors. This widespread adoption could help lead the industry in compliance and foster standardization and comparability across firms.
The GIPS Standards provide a marketing advantage and are considered "best practice" for firms. Institutional investors should mandate compliance with the GIPS Standards, with an effective date of 1 January 2021. This mandate could push more hedge funds to adopt the standards, enhancing trust and credibility in the industry.
In conclusion, the 2020 GIPS Standards are a significant step towards increasing transparency and standardization in the hedge fund industry. The transparency in net-of-fee returns reveals the actual investor experience post fees, which is key for fairness, comparability, investor trust, and regulatory compliance. The GIPS Standards apply to all asset classes and sectors, making them a universal benchmark for investment performance reporting.
[1] The Sortino Group. (n.d.). The 2020 GIPS Standards: What You Need to Know. Retrieved from https://www.sortinogroup.com/2020-gips-standards-what-you-need-to-know/
This article is a guest article for Hedge Funds, published by The Sortino Group. Reproduction, storage, or transmission of the publication is subject to certain conditions and requires permission from the publisher.
- Institutional investors should mandate compliance with the GIPS Standards, particularly for hedge funds, as it offers a marketing advantage and promotes fairness, comparability, investor trust, and regulatory compliance.
- The 2020 GIPS Standards, requiring transparency in net-of-fee returns, are crucial for hedge funds, providing investors with a clear understanding of the fees associated with their investments and enabling them to accurately assess fund performance.
