An Investment Policy Statement (IPS) is the blueprint for how a portfolio should be managed.
It defines objectives, guidelines, constraints, and responsibilities — ensuring the portfolio remains aligned with long-term goals regardless of market conditions, emotional impulses, or unexpected events.

Every serious investor, institution, and financial advisor uses an IPS because it provides structure, discipline, and clarity.
In alternative investing, where liquidity, risk, and complexity vary widely, an IPS is even more essential.

This article walks through how to build a robust, professional-grade Investment Policy Statement.

1. What Is an Investment Policy Statement (IPS)?

An IPS is a formal document that outlines:

• your investment goals
• your risk tolerance
• your return objectives
• your time horizon
• your liquidity needs
• your constraints and preferences
• your strategy for achieving those goals
• your rules for monitoring and rebalancing

Think of it as the contract between the investor and the investment strategy.

An IPS prevents emotional decision-making and ensures consistency.

2. Why Every Investor Needs an IPS

A. Provides Structure and Discipline

You no longer guess what to do when markets move — the IPS tells you.

B. Aligns Strategy With Long-Term Goals

Everything in the portfolio must serve the IPS, not the other way around.

C. Reduces Behavioral Mistakes

The IPS protects you from:

• panic selling
• FOMO buying
• impulsive strategy changes

D. Facilitates Accountability

For institutions, advisors, or committees — the IPS clarifies roles and responsibilities.

E. Enables Better Portfolio Management

Clear rules for:

• rebalancing
• risk budgeting
• asset selection
• liquidity planning

An IPS is the investor’s anchor.

3. Components of a Professional Investment Policy Statement

Below is a complete IPS framework used by institutions and wealth managers.

1. Investor Profile & Objectives

Document:

• investor type (individual, family office, institution)
• purpose of the portfolio
• long-term financial goals
• secondary objectives (income, growth, capital preservation)

Example Objectives:

• Generate 6–8% long-term return
• Preserve purchasing power
• Produce stable income with low drawdowns
• Allocate to private markets responsibly

2. Return Objectives

State your target return clearly.

Return targets may include:

• absolute return targets
• real return targets (e.g., CPI + 4%)
• benchmark-relative targets

Examples:

• Achieve a 7% annualized return over a full market cycle
• Outperform a 60/40 benchmark by 2% per year
• Generate 4% cash yield from income assets

Your return objective guides strategy selection.

3. Risk Tolerance & Risk Constraints

Define how much volatility or drawdown you can accept.

Types of Risk:

• market risk
• liquidity risk
• credit risk
• leverage risk
• concentration risk
• alternative investment risk
• inflation risk

Risk Parameters:

• maximum expected drawdown
• volatility limits
• leverage constraints
• allocation caps (e.g., no more than 30% in any single asset class)

A good IPS balances ambition with realism.

4. Time Horizon

Time horizon influences:

• asset selection
• liquidity planning
• risk tolerance

Examples:

• Short-term: <3 years
• Medium-term: 3–10 years
• Long-term: 10+ years

Private market investing typically requires long horizons (7–12+ years).

5. Liquidity Needs

Illiquid assets like private equity, private credit, and real estate require careful liquidity planning.

Document:

• expected withdrawals
• cash reserve needs
• emergency liquidity
• capital call obligations
• constraints on illiquid allocations

Example Constraint:

“No more than 25% of the portfolio may be in assets with lockups exceeding 5 years.”

6. Income Needs

If the portfolio must generate income:

• define minimum yields
• determine payout frequency
• identify approved income sources

Examples:

• private credit
• real estate income
• dividends
• infrastructure yield

Income requirements shape risk, duration, and asset mix.

7. Asset Allocation Strategy

This is the heart of the IPS.

Define:

• target weights for each asset class
• allowable ranges
• core vs. satellite allocations
• rebalancing frequency
• risk budgets

Example Allocation:

• 40% public equities
• 20% private equity
• 20% real estate & infrastructure
• 10% private credit
• 10% diversifiers (hedge funds, commodities, managed futures)

This section may include:

• tactical flexibility
• constraints on leverage
• constraints on single assets or managers

8. Investment Selection Criteria

Define how investments will be chosen.

Public Markets:

• diversification requirements
• factor tilts
• cost constraints

Private Markets:

• manager selection criteria
• minimum due diligence requirements
• performance expectations
• track record thresholds

Alternatives:

• correlation role
• liquidity parameters
• risk characteristics

This ensures consistency and professionalism.

9. Monitoring, Reporting & Review

Detail how the portfolio will be monitored:

Reporting Frequency:

• quarterly performance reports
• annual IPS review

Key Metrics:

• performance vs benchmark
• Sharpe and Sortino ratios
• drawdown analysis
• liquidity coverage
• TVPI, DPI, IRR (for private markets)
• risk budget adherence

Consistent monitoring is essential to long-term success.

10. Rebalancing Policy

Define rules for:

• rebalancing frequency
• tolerance bands (e.g., ±5%)
• cash flow–driven rebalancing
• tax-efficient rebalancing

Example:
“Rebalance when allocations deviate more than 5% from targets, or at least annually.”

11. Roles & Responsibilities

Clarify who does what:

• investment committee
• advisors
• custodians
• managers
• auditors

Accountability keeps the IPS enforceable.

4. Common Mistakes When Creating an IPS

1. Setting unrealistic return goals

Return targets must match risk tolerance.

2. Overestimating liquidity tolerance

Private markets require careful planning.

3. Ignoring downside risk

Volatility is not the only risk.

4. Too much complexity

An IPS should be understandable and actionable.

5. Not updating the IPS

Life changes → goals change → IPS must change.

5. Who Should Use an IPS?

An IPS is essential for:

• individuals building significant wealth
• families managing multi-generational capital
• RIAs and financial advisors
• foundations and endowments
• pension funds
• anyone investing in alternatives

It eliminates guesswork and drives professional-grade decision-making.

Final Takeaway

An Investment Policy Statement is the foundation of disciplined portfolio management.
It defines your goals, constraints, strategy, and rules of engagement — ensuring that every investment decision aligns with long-term objectives.

Whether you’re an individual investor or overseeing institutional capital, an IPS is the roadmap that keeps your portfolio stable, rational, and purpose-driven.