Gips L2

Section: Global Investment Performance Standards (GIPS) — Level 2 Estimated study time: 60 minutes Content: The Global Investment Performance Standards (GIPS) are a set of voluntary, ethical standards established by CFA Institute for investment performance measurement and presentation. GIPS compliance is claimed at the firm level — an individual manager cannot claim GIPS compliance independently. At CFA Level 2, candidates must understand the requirements for defining the firm and composites, the specific calculation methodologies, the mandatory disclosures, and the verification process. Unlike Level 1, which focuses on GIPS conceptual understanding, Level 2 tests whether a firm's presented performance meets GIPS requirements and asks candidates to identify specific violations in sample presentations. The foundation of GIPS is the composite, defined as an aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy. All actual fee-paying, discretionary portfolios must be included in at least one composite — this is the key requirement that prevents cherry-picking. A firm cannot include only its best-performing accounts in a composite or exclude underperforming accounts while they are still active. Terminated accounts must be included in the composite through their last full measurement period and cannot be retroactively removed to clean up the track record. Carve-outs (segments of a broader portfolio managed to a specific sub-strategy) may be included in composites only if they are managed with their own cash allocations and as separate portfolios. Performance calculation under GIPS must use time-weighted rates of return (TWR) for periods beginning on or after January 1, 2005. TWR eliminates the distorting effect of external cash flows (client contributions and withdrawals) that are not under the manager's control. The Modified Dietz method is…