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IOSCO Offers 9 Principles For Hedge Fund Valuation

Date: Friday, March 16, 2007
Author: Hedge Fund Daily

The International Organization of Securities Commission has issued for a comment a report that offers nine principles for proper valuation of hedge funds – only days before the Alternative Investment Management Association is set to offer up its version of the same. IOSCO says the chief aim of the principles is "to seek to ensure that hedge fund’s financial instruments are appropriately valued, and, in particular, that these values are not distorted to the disadvantage of investors." While the group says the principles apply to all hedge funds structures, IOSCO says it recognizes differences in makeup should be considered when applying them. The goal, says the group, is "to promote, among other things, the consistent application of a set of valuations policies and procedures in the valuation of a hedge fund portfolio, and independence in, and transparency of, this valuation process" regardless of jurisdiction and structures. Among the principles:

--Hedge funds should establish "comprehensive, documented policies and procedures" for valuing financial instruments held or used by hedge funds.

--HFs should identify methodologies used for valuation.
 --Such financial instruments should be "consistently" valued according to policies and procedures.
--Policies and procedures should be reviewed periodically to ensure "continued appropriateness."
--The hedge fund should seek "to ensure that an appropriately high level of independence is brought to bear" in the application of the policies and procedures.
--There should be "an appropriate level of independent review" of the individual values generated by the policies and procedures.
--The policies and procedures should describe the process for handling and documenting prices overrides.
--The governing body should conduct initial and periodic due diligence on third parties hired to perform valuations
--The valuation arrangement should be transparent to investors.

The deadline for comments on the principles – which have been endorsed by the U.K.’s Financial Services Authority -- is June 21. The AIMA, which is expected to issue its 15 guidelines around March 20, said IOSCO’s proposed principles "are along the same lines as our own recommendations."