Understanding GIPS® and Other Options for Verifying an Investment Track Record

For many emerging fund managers, one of the first questions that arises during fundraising is whether they need to comply with the Global Investment Performance Standards (GIPS®). Often, investors ask about performance verification and managers assume that GIPS compliance is required, but in reality, it is more nuanced.

While GIPS compliance can be a powerful credential, it is not always necessary, particularly for emerging managers in the early stages of fundraising. In many cases, investors are simply seeking confidence that reported performance is accurate, complete, and supported by reliable documentation. Depending on a manager's target investor base, budget, and operational resources, there may be more practical alternatives that achieve those objectives. This article explains the available options to help managers select the approach that aligns with their fundraising goals and investor expectations.

Key Takeaways

• Investors typically want proof that performance is accurate and supportable. GIPS compliance is not automatically required for emerging managers.
• Three main options to validate track records are GIPS verification, an examination engagement, and an agreed-upon procedures engagement.
• GIPS verification best suits managers pursuing large institutional or consultant-driven mandates that expect industry-standard comparability.
• The right choice depends on investor expectations and fundraising stage, not a one-size-fits-all compliance requirement.

Option 1: GIPS Verification

For managers targeting broad institutional distribution, compliance with GIPS can provide a recognized framework for presenting investment performance. A GIPS verification assesses whether a firm's performance policies and procedures have been designed in compliance with the GIPS standards and have been implemented on a firmwide basis. GIPS is designed to promote fair representation and full disclosure of investment results, allowing prospective investors to compare managers on a more consistent basis. Managers may also have an independent performance examination of one or more specific composites in accordance with the GIPS standards.

Why Do Managers Pursue GIPS?

Managers primarily pursue GIPS to gain the following advantages:

• Globally recognized by institutional investors
• Enhances comparability across managers
• Demonstrates commitment to performance reporting best practices
• Strengthens credibility during institutional fundraising efforts

Is GIPS Common Among Alternative Managers?

Historically, GIPS has been most prevalent among traditional asset managers, including:

• Mutual fund complexes
• Institutional long-only managers
• Separate account managers competing for consultant-driven mandates

These firms were the original audience for the standards, and institutional allocators have long expected GIPS-compliant presentations in traditional asset management searches.

Alternative investment managers have traditionally adopted GIPS at lower rates. This includes:

• Hedge funds
• Private equity firms
• Venture capital managers
• Private credit funds
• Real estate funds

Early versions of the standards were often perceived as less compatible with the complexities of alternative investment structures, such as illiquid investments, irregular cash flows, leverage arrangements, subscription facilities, side pockets, and other fund features. The 2020 GIPS standards significantly expanded guidance for alternative investments, making compliance more practical for private markets and alternative managers. Nevertheless, many emerging alternative managers continue to rely on other forms of independent track record validation.

Key Challenges of GIPS

Despite its benefits, GIPS has two key challenges.

1. Implementation can be resource-intensive. It often requires substantial documentation, formalized policies and procedures, composite construction methodologies, and ongoing monitoring. For emerging managers with limited back-office infrastructure, these requirements can create significant operational and financial burdens.
2. Misalignment with investor expectations. Many emerging managers discover that prospective investors are not necessarily asking for GIPS specifically. Rather, they are asking for reliable evidence that reported returns are accurate and supportable. This distinction is important because there are other ways to provide independent validation.

Option 2: Examination Engagement

Managers seeking a high level of investor confidence without implementing a full GIPS program should consider an examination engagement. An examination engagement provides reasonable assurance over a performance schedule, much like an audit provides reasonable assurance over a fund’s financial statements. Here, an accounting firm evaluates whether the track record presentation, is fairly stated in all material respects, based on defined criteria, and issues an opinion on the presentation. Typical procedures may include recalculation of returns, reconciling portfolio positions and balances to independently confirmed broker statements, and evaluation of valuation methodologies and pricing used.

Advantages of an Examination Engagement

• Provides a formal opinion
• Offers substantial credibility with institutional investors
• Demonstrates robust third-party validation
• Serves as a strong marketing differentiator

Considerations Before Starting an Examination Engagement

• Can be expensive
• Requires extensive supporting documentation
• Can take long to complete, depending on scope

When Is an Examination Engagement the Best Fit?

An examination is best suited to managers pursuing institutional investors, endowments, pension funds, consultants, and larger family offices that expect a high degree of independent assurance.

Option 3: Agreed-Upon Procedures (AUP) Engagement

An Agreed-Upon Procedures engagement may represent the most practical balance between cost, timing, and investor confidence. In an AUP engagement, the accounting firm performs specifically agreed-upon procedures and reports the procedures performed and factual findings without providing an opinion or conclusion. Typical procedures may include recalculating performance metrics, confirming balances, and testing position pricing.

Advantages of an AUP

• More cost-effective than an examination engagement
• Flexible and customizable
• Faster execution
• Often sufficient for emerging managers’ fundraising efforts

Considerations Before Starting an AUP

• No formal opinion is issued
• Some institutional investors may prefer a higher level of assurance
• The scope varies depending on the agreed-upon procedures

When Is an AUP the Best Fit?

An AUP is best suited to first-time fund managers, spin-out teams, and managers seeking independent validation of a predecessor track record or separately managed account performance without incurring the cost of a full examination engagement. Fundraising may be focused primarily on family and friends.

Which Option Is Right for Your Firm?

The right solution largely depends on the investor base being targeted.

The key question is often not "Do I need GIPS?" but rather "What level of independent validation do my investors expect?"

Making the Right Choice for the Firm

Although emerging managers may believe GIPS compliance is required to establish credibility, oftentimes, investors are just seeking confidence in the reliability, completeness, and transparency of reported performance.

For managers targeting large institutional mandates, GIPS verification may ultimately be the right answer. At the same time, an examination or AUP engagement may provide a substantial, meaningful third-party validation. When deciding which approach is suitable, look for the one that aligns with your investors’ expectations, fundraising objectives, and your current stage of development.

Ultimately, the goal of an independent verification is to build trust, and the managers who do that are best positioned to earn investor confidence and successfully raise capital. For further discussion on how EisnerAmper works with emerging and established fund managers to validate their investment track records, please get in touch with our team below.