GIPS and Hedge Funds: Is Compliance a Certification Agent?

Abstract

This study examines a sample of global hedge funds and focuses on analyzing characteristics consistently predictive of being GIPS compliant. Hedge fund data is merged with the CFA Institute’s list of GIPS compliant firms. The authors find that smaller funds, with less experienced managers and those not denominated in US currency, are more likely to be compliant. They also find that firms with a strong internal control mechanism, defined as having one of the big four accounting firms as an auditor, are more likely to claim compliance. Turning to some core elements of the investor-fund relationship, they find performance fees are lower in firms claiming compliance, but past performance is insignificantly different. Collectively, the results suggest that GIPS compliance is useful to smaller and riskier firms that want to display confidence and transparency in their performance, thus supporting the notion that compliance is an additional certification agent. There is also some evidence to suggest a benefit to the investor in lower fees.

TOPICS: Real assets/alternative investments/private equity, global markets, legal/regulatory/public policy, performance measurement

Key Findings

• ▪ The minority number of hedge funds that chose to be compliant prior to the revised GIPS standards of 2020 are typically relatively smaller, with less experienced managers, and based in non-US currency.

• ▪ Compliant firms have smaller performance fees, resulting in a lower overall fee structure, compared to their noncompliant counterparts.

• ▪ Results are consistent with the notion that funds that chose compliance are those that could benefit from the additional certification it could provide.