Investment Policy Statement (IPS)

Investment Policy Statement IPS (Investment Policy Statement) — the “Constitution” for an investor, a document that defines all key parameters of capital management. This is not just a formality — an IPS protects both the investor and the manager, creating clear boundaries for decision-making.

Why is an IPS needed?

Discipline — prevents emotional decisions during moments of panic or euphoria
Clarity of expectations — both investor and manager equally understand the goals
Legal protection — document of fiduciary duty
Continuity — a new CIO understands how to manage the portfolio
Regulatory compliance — requirement of DFSA, SEC, FCA for institutional investors

Structure of the IPS: full breakdown

Section	Content	Example wording
1. Investment Objectives	Target return, investment horizon, purpose of funds	“Achievement of a real return of 4% per annum over a 10+ year horizon to finance pension obligations”
2. Risk Tolerance	Maximum drawdown, VaR limits, volatility	“Maximum drawdown not to exceed 15% over any 12-month period. VaR(95%) not more than 2% daily NAV”
3. Constraints	Prohibited assets, liquidity, ESG, tax restrictions	“Prohibited: tobacco, weapons, gambling. Minimum 20% of portfolio in assets with T+1 liquidity”
4. SAA (Strategic Asset Allocation)	Target weights of asset classes with allowed ranges	“DM equities: 35% (30–40%), IG bonds: 25% (20–30%), Alternatives: 10% (5–15%)”
5. Rebalancing	Triggers, procedure, frequency	“Rebalancing when asset class deviates by ±5% from target weight or quarterly”
6. Benchmark	Index for performance evaluation	“60% MSCI World + 40% Bloomberg Global Aggregate”
7. Governance	Roles, decision-making processes, reporting	“IC meets monthly. Quarterly report for Board of Trustees”

Example of a real IPS for a family office ($50 million)

Objective: Preservation of capital’s purchasing power with moderate growth.
Target real return: 3–4% per annum after inflation and fees.
Horizon: Perpetual (multi-generational wealth)
Risk:
- Maximum drawdown: 20% (absolute)
- Portfolio volatility: 8–12% per annum
- VaR(99%, 1 day): 2.5% NAV
Constraints:
- Minimum 15% in liquid assets (T+1)
- Maximum 20% in a single issuer (except for government bonds)
- ESG: exclusion of companies with ESG rating below BBB (MSCI)
- Leverage: maximum 1.2x gross exposure

When to review the IPS?

Trigger	Action
Scheduled review	Annually or every 3 years (depending on investor type)
Change in circumstances	Change of horizon, major withdrawal/contribution, changes in legislation
Structural market changes	New asset classes, changes in correlations
Change of CIO	Review within 90 days

Critically important rule
IPS does NOT change in response to short-term market movements!
When the market falls by 30%, there is a temptation to “temporarily” reduce equity exposure. This is a mistake — the IPS exists precisely to protect against such decisions.
The exception is if the investor’s fundamental circumstances have changed (horizon, liquidity needs).

Typical mistakes in an IPS

Ranges too broad — “Equities 20–80%” gives no discipline
Unrealistic objectives — “10% per annum with 5% volatility” is impossible
Absence of a rebalancing procedure — without this, SAA is meaningless
Ignoring liquidity — illiquid assets cannot be sold in a crisis
No benchmark — impossible to assess the quality of management