What are the Global Investment Performance Standards (GIPS) and why were they created?

GIPS provides a comprehensive overview question, which is perfect for building a mental framework before diving into details.

What Problem GIPS Solves

Before GIPS, investment firms had enormous latitude in how they reported performance. Common abuses included:

• Cherry-picking the best accounts to show prospects
• Survivorship bias — dropping poor performers from historical records
• Inconsistent fee treatment — showing gross returns to look better
• Different calculation methods — making cross-firm comparison meaningless

GIPS creates a global, standardized framework for performance reporting, ensuring that investors can make fair comparisons.

Who Complies?

GIPS compliance is voluntary but widely expected in the institutional investment industry. When a firm claims compliance:

• The claim applies to the entire firm, not individual products
• The firm must comply with ALL GIPS requirements — there is no partial compliance
• "In compliance with GIPS" is the only acceptable wording (not "in the spirit of" or "substantially compliant")

Core Principles

1. Fair representation and full disclosure — the overarching objective
2. Composites — all discretionary portfolios grouped by strategy
3. Time-weighted returns — standard methodology (with exceptions for PE/RE)
4. Gross and net returns — both must be available
5. No retroactive compliance — firms cannot go back and claim compliance for periods they were not actually following GIPS
6. Verification — voluntary but encouraged; an independent third party reviews GIPS processes

The Verification Distinction

Verification is a review of whether the firm's processes and procedures are designed to present performance in compliance with GIPS. It does NOT guarantee the accuracy of any specific composite presentation.

Performance examination goes deeper — it tests a specific composite to determine whether it has been constructed and presented in compliance.

Key Numbers to Remember

• Minimum 5 years of GIPS-compliant history initially, then add a year annually until reaching 10 years
• Composites must include all actual, discretionary, fee-paying portfolios
• Firms must use trade-date accounting
• Returns must be calculated at least monthly (quarterly for PE)

Exam tip: GIPS is heavily tested at all three CFA levels. Focus on composite construction, the voluntary nature of compliance and verification, and the "all or nothing" firm-wide requirement.

For comprehensive GIPS preparation, explore our CFA ethics course.