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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Effective: 1 October, 2012 - 31 December, 2019

Categories: Alternative Investments

Source: Guidance Statement on Alternative Investment Strategies and Structures

For the weighting of individual portfolio returns within a composite, our policy is to take the portfolio values as of the end of the previous month (assuming they are equal to the value at the beginning of the current month). This suffices for all portfolios except for our hedge fund because external cash flows are always booked in the hedge fund on the first day of the month due to the subscription/redemption timing. As a result, there may be a significant difference between the portfolio’s beginning value and the value after the first business day of the month. Can we incorporate the external cash flows in the portfolio weighting method?
The GIPS standards require that composite returns must be calculated by asset weighting the individual portfolio returns using beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows. The Guidance Statement on Calculation Methodology elaborates on three acceptable methods, which are:
- Beginning Assets Weighting Method;
- Beginning Assets Plus Weighted Cash Flow Method, and
- Aggregate Return Method.
In this situation, the Beginning Assets Plus Weighted Cash Flow Method may be used as one of the acceptable methods allowed by the GIPS standards. Using this method would take into account the external cash flows occurring on the first day of the month.

Firms must create a policy for weighting portfolios within a composite using any of the three methods above and apply the policy to the composite consistently.