Hedge Funds Valuation and Pricing Survey Launched

Stephen Harris

3 May 2005

The Alternative Investment Management Association, has announced the results of the first comprehensive global survey of hedge fund asset pricing and valuation practices which measured the views of investors, hedge fund managers and hedge fund service providers regarding issues surrounding the valuation of assets held in hedge fund portfolios. The survey, “Asset Pricing and Fund Valuation Practices in the Hedge Fund Industry” also includes recommendations for increasing understanding of different approaches to pricing and valuation and enhancing existing practices and procedures within the industry. The key findings include: · 32 per cent of respondents report that the pricing of illiquid instruments represents the most significant challenge with regard to portfolio valuation; · Hard-to-value instruments represent only 14 per cent of the aggregate value of the funds managed by respondents; · 73 per cent of hedge fund respondents have an independent administrator to provide NAV; · 65 per cent of all respondents have a value error tolerance that their firm uses before re-calculating NAV; · 93 per cent of administrators are fully independent from the manager; · There is a general desire to enhance valuation practices and procedures. The main recommendations were: · A summary of practical and workable pricing and valuation practices and procedures should be documented, approved by the board of directors, trustee or general partner of the fund and reviewed on a regular basis; · The fund offering document should explicitly describe the potential limitations of valuation and pricing practices; · The NAV of the fund should be produced by parties who are not involved in the investment process of the investment management entity; · Pricing and valuation policy should be formalized in advance of fund launch and should be adequately described in the fund’s offering document; · The pricing and valuation policy should explicitly clarify the role of each party in the valuation process; · The decision to use a pricing model rather than a market price in determining an asset value should be properly justified; · Where necessary, NAV calculations should be subject to appropriate checks and balances; · NAV reports should be addressed directly to investors by the administrator, where an administrator is used. The survey involved 76 questionnaires and 16 qualitative interviews, totaling 92 organisations that collectively manage $58 billion and invest/allocate $72 billion. It was sponsored by PricewaterhouseCoopers, Bisys, CITCO, Financial Risk Management and Fauchier Partners.