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"Disclose Leverage and Derivative Use"

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CHARLOTTESVILLE, Va. (–The Association of Investment Management and Research expects to develop by year-end a final proposal for adding to its Global Investment Performance Standards new provisions dealing with the use of leverage and derivatives. The draft proposal issued earlier this year indicates it will demand greater transparency on these subjects.

The AIMR’s investment performance council created a subcommittee on leverage and derivatives three years ago, just as the U.S. Congress was considering reform of the commodity futures regulatory system. The subcommittee has since identified critical performance presentation issues and developed what it believes represents global best practices.

Some of the subcommittee’s draft proposals would, if adopted by the whole AIMR, become new performance standards, part of the GIPS, which have become very influential since their initial codification a decade ago. In effect, those rules would be mandatory for many institutional investors. Other proposals would become “guidance.”

The proposals would require that investment managers disclose to their investors the presence, use and extent of leverage, derivatives or hedging, “including a description of the use, frequency and characteristics of the instruments and strategy so that prospective clients can identify associated risks.” Those managers who track an index would be required to disclose the difference between their performance and the benchmark (“tracking error”) as well as the method, e.g. geometric or arithmetic, used to calculate tracking error.

The AIMR has sought public comment on the subcommittee’s proposals–and received a good deal of it, prior to the April 30 deadline. It contemplates an effective date of Jan. 1, 2005.

Jean-Pierre J. Mittaz, vice president of the Goldman Sachs Asset Management, New York, which includes a hedge funds strategies group, commented for example that he is concerned the AIMR definitions treat all derivatives use as leverage.

For example, Mr. Mittaz wrote, if a fixed-income portfolio manager uses futures “as a cost-effective way for duration extension or reduction or to fine-tune yield-curve exposure,” or an equities portfolio manager sells covered call options as part of an exit strategy, their decisions have not been “driven by leverage considerations.”

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