Grygo is the chief content officer for FTF & FTF News.
The blind and clumsy reach of the regulators will have a fairly profound impact upon performance measurement practices for investment firms. But more regulation may not yield the clarity intended to help investors and firms. That’s the take-away from a panel that was part of the 5th Annual Performance Measurement conference yesterday in New York, presented by FTF and Olmstead Associates.
On the upside, it’s clear that performance measurement is hitting its stride, partly because of the specter of regulation. It’s moving beyond crunching numbers and metrics that may or may not truly quantify the returns or the value of investment vehicles. It’s a discipline that is pushing firms to review and perhaps realign middle and back office functions such as analytics and data repositories; some firms may even use outsourcers after realizing the full scope of this important responsibility.
Overall, firms are fighting the good fight to break down the stumbling blocks to accuracy and consistency, say panelists. High on their wish lists are demands for data transparency, data aggregation, integrated reporting and improved post-trade compliance. Panelists also pointed out that the push to bolster performance measurement is also exposing a gap that needs to be closed between the business side’s need for external compliance and the IT department’s need to fulfill internal requirements for the better distribution and maintenance of good data.
Aside from the data management needs, the panel discussion revealed that firms will have to tackle the Rashomon effect permeating performance measurement caused by competing methodologies and bad numbers. Value-at-Risk (VaR) calculations, for instance, come in many variations and can provide multiple spins on performance. “You can put lipstick on any pig,” says one panelist about the temptation to use metrics to obfuscate poor performance.
Instead of lipstick, though, firms are turning to industry bodies such as the Global Investment Performance Standards (GIPS) organization, which offers principles to help investment firms calculate and report their results to clients. In fact, many firms say they have GIPS compliance and some have even verified compliance through an independent third-party provider. But such blessings are not cheap. A panelist yesterday estimated that the GIPS verification price tag for his emerging market debt hedge fund is approximately $20,000. Like many hedge funds, the panelist’s firm complies with GIPS standards but is not willing to pay the steep cost of verification. However, a conference attendee countered that verification was an expensive necessity for asset management firms. Without it, asset managers would be “dead in the water,” according to the attendee.
The panelist from the hedge fund is convinced that many regulators will be in “way over their heads” as they attempt to take on performance measurement as part of the Dodd-Frank-inspired push for transparency. In fact, the panelist worries that the coming hedge fund registration with the SEC will be “amateur hour again” for regulators and firms, resembling the days long before Dodd-Frank when regulation was truly lacking.
Other panelists noted that all firms need regulators to move from vague principles to actually specifying the performance measurement data they need for their oversight. But as Dodd-Frank takes root, it’s becoming clear that the regulators may be too busy to provide those much-needed specifications and will leave firms in the lurch.
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