How are carve-outs treated in GIPS composites?

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AcadiFi · Accepted Answer

A carve-out is a portion of a multi-asset portfolio representing a specific segment (e.g., the equity allocation within a balanced mandate), used as a standalone track record for a narrower strategy composite. **Pre-2020 GIPS treatment:** Carve-outs allowed with synthetic cash allocation, but complex and widely criticized. **GIPS 2020 treatment:** Carve-outs are permitted but with strict conditions: 1. **Standalone portfolio requirement** — To include a carve-out in a composite, the firm must also manage at least one standalone portfolio in the same strategy (i.e., the strategy must be offered as a dedicated product) 2. **Cash allocation** — Cash must be allocated to the carve-out using a consistent methodology (typically proportional to the segment's weight or strategic allocation) 3. **Disclosure required** — Firm must disclose the use of carve-outs, the percentage of composite assets represented by carve-outs, and the method for allocating cash **If NO standalone portfolio exists,** carve-outs CANNOT be used to create a composite for that strategy — firms can still report carve-out returns to existing clients but not for prospective marketing. Example: Grovesnor Capital manages 'Global Balanced' portfolios with 60% global equity / 40% global fixed income. They want to create a 'Global Equity' composite using the equity carve-out of each balanced account. Conditions: - Grovesnor must also manage at least one dedicated Global Equity portfolio (they do — one institutional account funded Jan 2024) - Cash allocated to equity carve-outs at 3% (matching standalone portfolio's cash level) - Composite discloses 'Composite contains carve-outs representing 72% of composite assets at 12/31/2025' ```mermaid flowchart TD A[Want carve-out composite] --> B{Standalone portfolio exists?} B -->|No| C[Cannot create
composite] B -->|Yes| D[Allocate cash consistently] D --> E[Include carve-outs] E --> F[Disclose % and method] ``` The standalone requirement prevents firms from marketing strategies they don't actually run as dedicated mandates, protecting prospects from theoretical track records.

How are carve-outs treated in GIPS composites?

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