101 Concepts for the Level I Exam
Concept 100: Overview of GIPS
GIPS stands for ‘Global Investment Performance Standards’.
Why were the GIPS standards created?
In the past, investment performance presentations were misleading. Questions about the accuracy and credibility of data made comparisons among different investment firms difficult. Common misleading practices included:
- Representative accounts: Using only the best performing portfolios to represent the firm’s overall performance.
- Survivorship bias: Excluding accounts that performed poorly and were consequently terminated.
- Varying time periods: Selecting time periods during which the fund had exceptional performance.
The GIPS standards were created to prevent misrepresentation of performance. They establish an industry-wide, standard approach for calculation and presentation of investment performance.
What parties do the GIPS standards apply to?
GIPS apply to investment management firms. Compliance to GIPS is voluntary and not required by any legal or regulatory authorities.
Who is served by the standards?
- Existing and prospective clients of investment management firms: They get credible and standard data. This allows them to have more confidence in reported performance and makes comparisons among firms easy.
- Investment management firms: Compliance with GIPS helps firms with their marketing activities. It can also strengthen the firm’s internal controls.
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