Q & A Database

The GIPS Standards Q&A database contains questions and answers (Q&As) on various searchable topics that provide additional interpretation on an issue. Q&As are considered to be authoritative guidance and must be followed in order to claim compliance with the GIPS standards.

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Archived

Effective: 1 October, 2012 - 31 December, 2019

Categories: Alternative Investments

Source: Guidance Statement on Alternative Investment Strategies and Structures

A firm manages a hedge fund with several share classes, which are similarly invested but have a different base currency. The non-HKD share classes are systematically hedged in HKD in order to achieve a return similar to that of an investor in the HKD-denominated share class. Should the non-HKD share classes be included in the HKD-denominated composite?

Portfolios with different base currencies may be included in the same composite but their returns must be expressed in the same currency as that of the composite. Although the hedged returns of portfolios denominated in different currencies are intended to be similar if they are managed to the same strategy, there will be a difference in returns (even with perfect hedging) equivalent to the cost (or benefit) of hedging. This cost (or benefit) of hedging caused by the interest rate differential between currencies is potentially significant over time. In this situation, including non-HKD share classes in the HKD-denominated composite may not be appropriate.

If a firm wishes to include each share class in the composite, the firm may convert the returns and assets for all of the share classes to HKD for inclusion in the composite; however, it is important to recognize that the act of hedging from different base currencies to HKD may create different investment strategies warranting more than one composite.

The firm may also use the HKD share class as the proxy for the performance for the total fund; however, the composite assets must include all of the assets from all of the share classes.