Performance Perspectives Blog

Heavy emphasis on risk?

by | Mar 8, 2010

Money Management Letter offered the following regarding the revised Global Investment Performance Standards (GIPS(R)) which will go into effect next January:

“The CFA Institute has placed a heavy emphasis on risk disclosure in its revised Global Investment Performance Standards, which it announced late last month. For the first time, it is requiring that firms seeking to comply with the institute’s standards give investors a standard of comparison of risk in investment strategies.”

First, I wouldn’t say that it’s the “CFA Institute” that is placing the emphasis, it’s the GIPS Executive Committee. Granted, the CFA Institute technically owns the trademark for GIPS, but to attribute these requirements to them is, I bit, inaccurate. Secondly, “heavy emphasis”? Requiring a 3-year annualized standard deviation constitutes “heavy emphasis”? There are countless individuals who would argue that standard deviation isn’t even a risk measure.

The standards should require the disclosure of risk and standard deviation is arguably the most frequently used measure of risk, in spite of its detractors. But, it’s also a poor measure of risk from many perspectives. Perhaps a better requirement would be for firms to provide a measure of risk but a measure of their choosing. And while some might say “then how can you compare managers, when one shows tracking error and another beta?” we could respond “then ask the managers to show additional measures!” Surely they would be willing to do this. Okay, so perhaps this isn’t the best idea, but is there a “best” idea? Tough subject, no doubt. But, I still stand with my earlier statement that we aren’t seeing a “heavy” emphasis on risk. I guess hyperbole still be used to get your attention, though: it got mine.

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