Today we return with a look at changes to return and risk calculations.

Return and risk calculations

There have been several changes introduced which deal with how returns are calculated.

The 2005 and 1999 editions of GIPS had wording that might be confusing: it suggested that firms should report performance for five years or since a composite’s inception (which of course could be something other than the start of a new year) but that returns had to be annual, thus conflicting with the prior statement. To eliminate the confusion, they introduced the concept of “stub periods,” which are returns for periods less than a year. Therefore, going forward firms are obligated to report performance for periods less than a year, when (a) a composite was created less than five years ago and the start date is not January 1 (see ¶ I.5.A.1.c) and (b) report performance through the termination date of a composite (or any break in performance), whether it is on December 31 or not ( see ¶ I.5.A.1.d).

Firms must disclose if model or actual fees are used for net-of-fee returns (see ¶ I.4.A.6.b). In addition, firms must disclose if the net-of-fee returns are net of any performance-based fees (see ¶ I.4.A.6.c).

Real estate closed-end fund composites must now, in addition to showing time-weighted returns, since-inception internal rates of return, using quarterly cash flows at a minimum (see ¶ I.6.A.17 and ¶ I.6.A.18).  In addition, these composites must include the host of statistics (e.g., since inception paid-in-capital, cumulative committed capital) (see ¶ I.6.A.25) which has been part of the private equity requirements since 2006.

Private equity’s SI-IRR must now be calculated using daily treatment of cash flows, where in the past monthly was permitted (¶ I.7.A.4).

We also now have a requirement, effective January 1, 2011, for firms to report three-year annualized ex-post standard deviation of the composite and benchmark for all annual periods going forward (see ¶ I.5.A.2.a). If the firm doesn’t feel standard deviation is appropriate for their composite, they must still report it and (a) explain why and (b) provide a three-year ex-post statistic for the risk measure they feel is appropriate (see ¶ I.5.A.2.b).

Disclosures

In the past, firms were to report the treatment of withholding; this is now only necessary if it’s “material” (see ¶ I.4.A.20).

Firms must disclose and describe any known material differences in exchange rates or valuation sources used among the composite’s portfolios, and between the composite and the benchmark (see ¶ I.4.A.21).

Firms must now disclose the benchmark’s description (see ¶ I.4.A.4). This may sound complicated, but in many cases it won’t be. For further details I suggest you review the definition of “benchmark description) in the glossary (see page 36).

At present, firms disclose that a list and description of composites is available upon request; this has been changed to be that a list of composite descriptions is available upon request (see ¶ I.4.A.11).

Also, today you disclose that information regarding your calculation and reporting is available; this has been changed: you will now be required to indicate that policies for valuing portfolios, calculating performance, and preparing compliant presentations are available (see ¶ I.4.A.12).

For custom benchmarks firms will be required to disclose their components, weights, and rebalancing process (see ¶ 4.A.31).

In addition to disclosing the presence, use, and extent of leverage and derivatives, firms must do the same now with short positions (if material) (see I.4.A.13).

That concludes my 3 day blogging for StatPro.  I encourage you to visit my blog at InvestmentPerformanceGuy.blogspot.com