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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CurrentEffective: 1 July, 2021Categories: Alternative Investments, Pooled FundsSource: GIPS Standards Technical Committee
Our firm manages a fund-of-funds with a master-feeder structure. The firm manages both the master fund and all feeder funds. No investment management fees or administrative fees are charged in the master fund; instead, these fees are charged at the feeder level. For composite purposes, how should we calculate gross-of-fees returns and net-of-fees returns? Also, how should we calculate pooled fund gross returns and net returns for inclusion in a GIPS Pooled Fund Report?
For composite purposes, the master fund’s return would be considered a gross-of-fees return because it does not reflect the deduction of investment management fees. If calculation of the net-of-fees return is desired and a firm uses the master fund return in the composite, the gross-of-fees return of the master fund will require an adjustment. The firm may identify the relevant actual investment management fees charged at the feeder fund level and deduct those fees from the master fund’s gross-of-fees return to arrive at the net-of-fees return.
Alternatively, when calculating net-of-fees composite returns, a firm may calculate gross-of-fees composite returns and deduct a model fee. This model fee must be either (a) the highest investment management fee incurred by each portfolio (either at the master fund level or at the feeder level, wherever the investment management fees are charged) in the composite or (b) the model fee appropriate to prospective clients. If the firm uses model investment management fees to calculate composite net-of-fees returns, the returns calculated must be equal to or lower than those that would have been calculated using actual investment management fees.
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 such a case, it is acceptable to use as the model fee the highest investment management fee applicable to the specific prospective client or the intended recipient of the GIPS Composite Report, as long as doing so results in net-of-fees returns that are no higher than those that would have been calculated using actual investment management fees.
A firm may manage a fund of funds with a master-feeder structure where the firm manages both the master fund and the feeder fund. In this scenario, when investment management fees are not charged in the feeder funds but are charged at the master fund level, the returns of the feeder funds would be considered net-of-fees returns if the feeder funds hold shares of the master fund that are already net-of-fees.
Sometimes a fee charged at the feeder fund level may lead to a cash flow at the master fund level, or vice versa. Firms may consider the corresponding cash flow as an external cash flow for the purpose of calculating the return at either the master level or the feeder level. Firms must take care to ensure that any external cash flow between a master fund and a feeder fund is treated properly when calculating gross-of-fees and net-of-fees returns.
A firm may also wish to calculate pooled fund gross returns and pooled fund net returns for inclusion in a GIPS Pooled Fund Report. Pooled fund gross returns could be calculated in the same manner already described. When calculating pooled fund net returns, however, the firm must consider administrative fees in addition to investment management fees. Pooled fund net returns must reflect the deduction of total pooled fund fees, which include all fees and expenses charged to the pooled fund, including but not limited to investment management fees and administrative fees. Pooled fund net returns could be calculated in the same manner as already described, except actual or model total pooled fund fees must be used instead of actual or model investment management fees.