Investment Policy Statement (IPS)

An investment policy statement (IPS) is the formal document governing how an allocator invests. It defines objectives (growth, preservation, spending/liability needs), constraints (liquidity, concentration, eligible assets), governance (decision rights and approvals), and monitoring expectations.

From an allocator perspective, the IPS is the portfolio’s constitution. In strong organizations, it is actively used: it shapes manager selection, pacing, rebalancing, and exceptions. In weak ones, it exists but does not govern behavior—exceptions become the real strategy.

How allocators define IPS risk drivers

Allocators evaluate:

• Objective clarity: what the portfolio is designed to achieve
• Constraint specificity: liquidity, concentration, leverage, eligible assets
• Allocation ranges: permitted drift bands and target governance
• Governance: IC structure, delegation, escalation thresholds
• Risk framework: drawdown tolerance, scenarios, factor exposure limits
• Manager standards: selection, monitoring, termination triggers
• Exception policy: who can override constraints and how it’s documented
• Reporting cadence: what is measured and reviewed

Allocator framing:
“Is policy actually used to govern behavior—or is it a document that sits on a shelf?”

Where IPS matters most

• institutions with fiduciary oversight
• family offices scaling from opportunistic to programmatic allocation
• portfolios increasing illiquid exposure
• volatile markets where discipline is tested

How IPS changes outcomes

Strong IPS:

• speeds qualification and reduces late surprises
• improves portfolio coherence and stakeholder trust
• reduces reversal risk due to clear constraints
• strengthens repeatable behavior and re-up patterns

Weak IPS:

• increases inconsistent rationales and exception drift
• slows decisions via repeated debates about constraints
• weakens governance defensibility
• creates portfolio behavior that changes with headlines

How allocators evaluate IPS discipline

Conviction increases when allocators:

• have clear ranges and action triggers
• reference IPS constraints in IC memos and decisions
• document exceptions with rationale
• show monitoring tied to policy, not ad hoc opinions

What slows allocator decision-making

• conflicting objectives without priority
• vague constraints and no explicit ranges
• unclear decision authority
• unlimited exceptions

Common misconceptions

• “IPS reduces flexibility” → good IPS improves speed and reduces regret.
• “IPS is only for institutions” → any allocator scaling capital needs one.
• “Rebalancing is optional” → without it, drift becomes the strategy.

Key allocator questions during diligence

• What constraints would disqualify an investment immediately?
• What are your allocation ranges and rebalancing triggers?
• Who can approve exceptions and how often do exceptions occur?
• How do you define and measure risk budget?
• What monitoring triggers a manager review or termination?