What are the key calculation methodology requirements under GIPS?

Question

AcadiFi · Accepted Answer

GIPS mandates specific calculation methodologies to prevent performance manipulation:

TIME-WEIGHTED RETURN (TWR):
- Required method for most composite returns
- Eliminates the distorting effect of client cash flows (deposits/withdrawals)
- Calculated using sub-period returns geometrically linked

Modified Dietz and Modified BAI are acceptable approximations when daily valuations are impractical, provided cash flow weighting is reasonable.

Since 2010 update: firms must value portfolios on any date with a LARGE cash flow — threshold defined by the firm, typically 10% of portfolio value.

Since 2020 update (GIPS 2020):
- MONEY-WEIGHTED RETURN (MWR / IRR) is required for private equity, real estate, and other closed-end strategies with limited cash flow control
- Firms must determine based on strategy characteristics, not convenience

OTHER REQUIREMENTS:
- Trade-date accounting (not settlement-date)
- Accrual accounting for fixed-income coupons and dividends (not cash-basis)
- Include cash returns
- Returns must be both GROSS and NET of fees when presented
- TOTAL returns (realized + unrealized + income)
- Consistent treatment within composite

BENCHMARK returns must be calculated using the same methodology and periodicity.

FEES:
- Actual trading costs must be deducted
- Bundled fees treatment must be disclosed
- Performance-based fees handled consistently

At Marlowe Capital Advisors, the operations team switched from monthly to daily valuation in 2023 to comply with large cash flow valuation requirements and maintain GIPS compliance across their growing composite of wealth management clients.

For CFA Level III, remember the big divide: TWR for traditional strategies, MWR for private capital strategies.

What are the key calculation methodology requirements under GIPS?

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