What internal controls does GIPS require for risk measurement?

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AcadiFi · Accepted Answer

GIPS requires firms to establish, document, and follow policies and procedures that ensure the integrity, accuracy, and consistency of investment performance reporting. Internal controls are central to this.

Required internal control areas:

1. Portfolio inclusion/exclusion: written rules for when a new portfolio enters a composite (typically the first full period under management) and when a terminated portfolio exits (last full period). Cherry-picking is prohibited.

2. Valuation policies: fair value measurement at least monthly for all portfolios, with independent oversight of pricing. For illiquid assets, documented fair value hierarchy.

3. Calculation methodology: time-weighted returns required for traditional composites (with money-weighted returns allowed for private market composites starting in GIPS 2020). Consistent use of beginning-of-period versus end-of-period values.

4. Error correction policy: documented materiality thresholds and procedures. Restated results must be disclosed when errors are material.

5. Documentation retention: records supporting all reported figures for a minimum time frame (typically aligned with local regulatory requirements, often 5+ years).

6. Risk measurement disclosures: starting GIPS 2020, firms must present the three-year annualized ex-post standard deviation (using monthly returns) for the composite and benchmark, OR another risk measure that the firm believes is appropriate.

7. Verification, if pursued: requires independent review of firm-wide policies.

Example: Highcliffe Asset Managers maintains a documented error-correction policy stating that any calculation error exceeding 10 bps in annual composite returns triggers restatement and disclosure in the next GIPS report. The compliance team runs quarterly reviews of composite membership against the firm-wide portfolio list to catch missing or orphaned accounts. This procedural discipline is exactly what GIPS expects and what verifiers test.

What internal controls does GIPS require for risk measurement?

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