Jonathan Boersma has been working hard to standardize the
quantification of investment risk as the chief overseer of the
CFA Institutes Global Investment Performance Standards
voluntary ethical principles known as GIPS. His next
task: getting investment firms to start reporting it. And not
just traditional asset managers, mind you; Boersma is also
taking on the trickier challenge of getting hedge fund, private
equity and real estate firms to adopt the reporting
Boersma shepherded the creation of new risk standards last
year. But they are only now coming onto the radar of investment
firms, as they complete their annual GIPS compliance exercise
preparing standardized reporting documents for
dissemination to institutional investors and investment
Between 85 percent and 95 percent of investment firms across
the globe use GIPS, first developed 25 years ago, to report on
their investment activities. Alternative investment managers
have been slower to take them up. That is changing, says
Boersma, as hedge funds and others look to make themselves more
attractive to pension fund and other big investors.
Boersma visited Institutional Investors
offices last week to speak with Senior Writer Frances Denmark
about his efforts to get hedge funds, private equity and real
estate investors on board with risk reporting according to
Institutional Investor: Why risk reporting
Boersma: We view performance as a combination of risk and
return. You cant look at them independently. Historically
the performance standards have focused on return elements.
Its much easier to standardize calculations and how
performance is generated. Weve recently been trying to
address how risk is quantified. [Were also working on]
qualitative measures through certain disclosures.
How did you arrive at a standard risk measure for
Risk is very difficult to get your hands around. Getting a
common definition is difficult. Some view it as variability of
returns. Others believe that a beta greater than one is somehow
riskier. Others view risk in terms of bets. For example, a
portfolio that is overinvested in technology stocks. Still
others see risk as the possibility of losing money or not
making money. Its difficult to create a single definition
that encompasses all of those elements, difficult to come up
with a measure. The purpose of our standards is to provide
What risk measurement did you arrive
Countless numbers of groups have tried to standardize risk.
At the end of the day they just gave up. They end up saying,
pick one measure and show that. But that flies in the face of
comparability. So weve had to start at a very basic
level, and introduce a measure of three-year standard deviation
What has been the reaction to this
Some people will argue that it isnt a risk measure,
especially managers with more esoteric strategies like hedge
funds. It gets to be a theological argument. I dont care
what you call it, its a statistical measure of
variability. Its not a perfect measure but its well
known. Every Morningstar report has standard deviation; anyone
can calculate it with Microsoft Excel. Its a good place
What method did you use to reach consensus on this
We followed a similar practice to regulators. We put out a
proposal to all CFAs and the GIPS community and asked for
Do you think investment managers will use the new
One of the games managers played in the past was,
Lets show whatever risk measurement that puts me in
the best light. Its now [part] of our GIPS
standards. Any firm that complies with GIPS has to use that
measure. Some firms argue that its not relevant. But it
indicates how your returns have varied over time. You show it
and can also show other risk measurements you think are
Why do you believe hedge funds and other alternative
managers will comply with GIPS?
Its a new era of transparency for hedge funds.
Theres been tremendous scrutiny of the industry and
attempts to regulate them and shine a little sunlight on them.
GIPS standards are a great way hedge funds can address some of
those issues. Theres nothing in GIPS that requires
revealing their proprietary information, such as top
Also, institutional investors are demanding compliance with
GIPS. For example, CalPERS and Norges Bank, the Norwegian
sovereign wealth fund, have adapted GIPS in presenting
performance reports to their boards. And large investment
consultants like Towers Watson and Mercer will say to asset
managers, Dont waste our time if youre not
compliant with GIPS. It provides a framework to present a
composite of multiple portfolios.
What has been the response from
The SEC has been advocating that hedge funds adopt GIPS.
Fairness, transparency and integrity GIPS is all about
that. Those have all been sore spots over the past few years.
Specific guidance on hedge funds is coming this summer.
How have hedge fund managers reacted to the new risk
This is industry-driven. We have participants from all
segments of the industry that helped develop these standards.
Its a universally held belief that an industry-developed
solution is preferable to a regulatory, mandated one.