Crying Out For GIPS

My Way News - Stimulus jobs overstated by thousands: "The AP review found some counts were more than 10 times as high as the actual number of jobs; some jobs credited to the stimulus program were counted two and sometimes more than four times; and other jobs were credited to stimulus spending when none was produced."

Performance Pet Peeve

Economics One: Despite claims, data continue to show small impact of stimulus:

"The table shows the latest Department of Commerce estimates of the contributions of consumption, investment, net exports, and government spending to the improvement in GDP growth from the first to second quarter. Growth improved by 5.7 percent (from -6.4 percent to -0.7 percent). Private investment was by far the major source. Government spending contributed 1.9 percentage points, but more than half of that was defense spending which was not part of the stimulus."

No, growth improved by 5.7 percentage points. Nevermind whether or not using percentages as ending and beginning values to calculate a percentage return is a proper way to express improvements.

GIPS Singapore Summary

GIPS Singapore Summary: "The GIPS Executive Committee (EC), the governing body for the Global Investment Performance Standards (GIPS), recently met in Singapore to review the comments received on the GIPS 2010 Exposure Draft and discuss proposed revisions."

Can Performance Presentation be Successfully Regulated Part II

From Trust and Delegation by Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz First Draft: June 16, 2009

"Funds that strategically lie on their DD reports have higher performance than other funds after the DD report....perhaps these funds are better funds. However, since these managers appear to only strategically lie to the DD company, they may also choose to “game” the return data reported to investors, which causes these funds to appear superior to their peers.

We also find funds that have external pricing have lower performance than funds that price their own portfolios. Non-independent pricing allows the opportunity to inflate performance through “cherry picking” of model prices or outright fraud."

Operational definition of "strategic liar": managers who voluntarily disclosed past problems but Due Diligence firm found additional legal or regulatory problems that would have been expected to be disclosed.

Can Performance Presentation Be Successfully Regulated?

From Trust and Delegation by Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz First Draft: June 16, 2009

"An event study shows that the DD reports are typically issued on high return funds three months after the historical performance has peaked. The DD reports are also issued at the point of highest investor flow into the fund. This pattern is consistent with return chasing behavior by institutional hedge fund investors. Brown et al. (2008) found no evidence that knowledge of operational risk in any way mediated the fund flow performance relation."

Would that be an investor behavior impervious to the most draconian regulation?

How To Abuse Carveouts

FT.com / Companies / Financial Services - Hedge funds misrepresent facts, says research:

"Managers most commonly misrepresented the amount of money they had entrusted to their funds...."

As previously mentioned, carveouts allow the presentation of a product AUM that is included in another product's AUM. Many people would simply add these product AUMs to get a firmwide AUM. Even with the firm AUM presented, summing the mandates will present a higher figure and sow confusion.

Cherry Picking

On the Internet, Everyone's a Critic But They're Not Very Critical - WSJ.com:

"Other critical reviewers say they get flak for their brutal honesty. Mark Nuckols, an American teaching finance in Moscow whose Amazon book ratings average a three, says he's concerned by what he senses is a practice of 'pre-emptive deletion.' When he posted a 'mildly critical review' of a recent children's book by Tom Tomorrow, it never surfaced. When he tried to post a review of another Tom Tomorrow book, it didn't show up, either."

Businesses whose revenue depend upon moving merchandise without a physical presence (e-tailers) need positive reviews of the items and have a conflict of interest when negative reviews appear. As a result, negative reviews are ripe for removal s Mr. Nukols discovered.

The Global Investment Performance Standards are designed to prevent this type of cherry-picking. Essentially, GIPS boils down to no cherry-picking of results. If it did not, then every asset manager would be look good.

One of the 2010 changes disallows carve outs that do not have its own cash. Previously, a firm could create a product from exisitng ones and claim it was representative of how the newly created product was actually managed. The simplest form was breaking a balanced account into its equity and fixed income components and marketing three products - the actual balanced one, an equity one and a fixed income one.

While that does not seem misleading, one already has a situation where the potential investor can no longer sum the AUM totals of the three products to get an idea of how much money and investment firm manages. Nevermind the deeper concern that the equity and fixed income carveouts are dependent on the balanced account guidelines for asset allocation decisions.

The more likely a practice can mislead a potential investor the more likely it will violate GIPS. Carveouts can certainly be one of those asset management practices.