What risk measures does GIPS require in composite presentations?

Question

AcadiFi · Accepted Answer

Since the 2010 revision (effective 2011), GIPS requires presentation of a specific ex-post risk measure alongside returns in composite presentations, with additional optional measures encouraged.

**Required ex-post risk measure:**
**3-year annualized ex-post standard deviation** of monthly returns, calculated for both the composite AND the benchmark, updated annually through each year-end.

For composites with less than 36 months of history, the standard deviation cannot be calculated — the firm must state this and may present other appropriate measures.

**Required internal dispersion:**
A measure of return variation ACROSS portfolios WITHIN the composite for each annual period, such as:
- High/low portfolio return range
- Equal-weighted standard deviation of annual returns
- Asset-weighted standard deviation
- Interquartile range

If the composite contains five or fewer portfolios for the full year, dispersion is not required (must disclose).

**Optional additional measures (encouraged, must be accurate if shown):**
- Sharpe ratio
- Information ratio
- Tracking error
- Downside deviation
- Beta vs benchmark
- Maximum drawdown

Example: Cloudbreak Capital's 'Cloudbreak Global Macro' composite at 12/31/2025 presents:

| Year | Composite | Benchmark | # Portfolios | Dispersion |
|---|---|---|---|---|
| 2025 | 9.8% | 8.1% | 14 | 1.1% |
| 2024 | 12.4% | 11.2% | 12 | 0.8% |
| 2023 | −4.2% | −5.6% | 11 | 1.4% |
| 2022 | 6.7% | 5.8% | 10 | 0.9% |
| 2021 | 11.5% | 10.3% | 9 | 1.0% |

**3Y ex-post std dev (annualized):** Composite 10.8%, Benchmark 11.4%.

```mermaid
flowchart TD
  A[GIPS Risk Requirements] --> B[3Y ex-post std dev]
  A --> C[Annual dispersion]
  B --> D[Composite + benchmark]
  C --> E[Range/std dev/IQR]
  A --> F[Optional measures]
  F --> G[Sharpe/IR/TE]
  F --> H[Drawdown/Beta]
```

Rationale: standard deviation alone is insufficient risk description, but mandating it provides consistent, comparable context to returns. GIPS 2020 updated guidance encourages additional risk measures appropriate to the asset class (e.g., duration for fixed income, max drawdown for alternatives) but leaves selection to firm judgment with disclosure.

What risk measures does GIPS require in composite presentations?

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