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

A firm has an offshore hedge fund that has four different share classes (A through D), each with its own investment management fee, which includes a performance-based fee. Because of the different fee structures, each share class may have different net returns. Over 80% of the fund is invested in Class A, which is the oldest share class. The firm mostly markets to prospective clients that will invest in Class A. The fund is the only portfolio in the composite. Can the compliant presentation include the net-of-fee return of Class A since it is most applicable to the prospective client, or must the firm present the net-of-fee return of the total pooled fund? Which net-of-fees return should a firm present if there are multiple series within Class A that were created to consider the different timing of new investors?
Firms have the following options when calculating net-of-fees returns that will be included in compliant presentations that are presented to prospective clients:
- Calculate gross-of-fees returns and deduct the highest investment management fee rate of any individual share class in the fund to arrive at the net-of-fees return.
- Calculate net-of-fees returns using all actual net-of-fees returns from all share classes and series.
In some situations, it may be impossible to definitively determine which investment management fee is the highest among all portfolios within a composite, such as when portfolios use a mix of fixed and performance-based management fees. In this example, it is acceptable to use the highest model fee applicable to the specific prospective client or the intended recipient of the compliant presentation as long as doing so results in net-of-fees returns that are lower than those that would have been calculated if actual (effectively charged) fees had been used. Such treatment would mean producing different versions of the specific composite’s compliant presentation for different prospective clients.

When calculating net-of-fees returns using model fees, the model fee must reflect the current fee schedule. When initially calculating net-of-fees returns for historical periods, the firm must determine whether it is appropriate to use the current fee schedule or the fee schedule that was in effect for the respective historical period. In all cases, net-of-fees returns calculated using model fees must result in net-of-fees returns that are no higher than those that would have been calculated if investment management actual fees had been used.

Different fund share classes are usually issued to differentiate between certain investor groups for tax reasons and/or to allow for different fee structures. Firms may calculate gross-of-fees returns and apply the most applicable investment management fee to the prospective client, which in this instance, is the investment management fee from Share Class A (i.e., the net-of-fees return of share class A will effectively be presented).

Firms may also present gross-of-fees returns to a prospective client. Additionally, whether presenting gross-of-fees or net-of-fees returns, firms must disclose the fee schedule appropriate to the compliant presentation.

Firms may show returns from the different share classes or series as additional information. If there are multiple series within Share Class A, and the firm is presenting net-of-fees composite returns based on Share Class A, the firm should either present a weighted net-of-fees return of all series within Share Class A or should reduce the gross-of-fees return by the investment management fee from the oldest or initial series to reflect the performance a prospective client would have received had it been invested in that strategy since its inception.

While a firm must disclose if model or actual fees are used to calculate net-of-fees returns, where net-of-fees returns are not straight forward and/or have multiple assumptions, additional disclosure about net-of-fees return calculations may be needed to ensure the principle of full disclosure is met. In addition, if a firm uses model fees to calculate net-of-fees returns, the firm must disclose the methodology used to calculate the net-of-fees returns.