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Hedge fund valuations ‘problematic’ say investors

Date: Friday, April 13, 2007
Author: Kris Devasabai, ICFA online

Nearly two thirds (64 per cent) of institutional investors say that accurately valuing their hedge fund holdings is problematic, according to a new report issued by State Street.

Of those who expressed concerns about the pricing of hedge fund investments, 53 per cent said they were worried because the fund’s general partner was solely responsible for the valuation, while 47 per cent said they were concerned that their hedge fund managers did not employ an independent administrator.

The State Street study argues that mounting pressure regarding valuation is now prompting investors to insist on independent pricing. The possibility of attracting new assets from pension plan sponsors covered by ERISA could also lead more hedge fund managers to adopt independent valuations in the US, according to the report.

In the UK, regulatory and industry initiatives to raise standards for hedge fund valuations have been in the works for years, with the FSA recently throwing its weight behind a set of hedge fund valuation principles developed by IOSCO. The Alternative Investment Management Association also issued a best practice guide on valuations last month.

Despite these concerns the report reveals a booming industry. Nearly two-thirds of institutional investors are now allocating more than 5 per cent of their portfolios to hedge fund strategies, while only 4 per cent have no allocation at all. By contrast, 16 per cent said they had no allocation in the 2006 study.

The study also revealed that, as they become more comfortable with hedge funds, institutional investors are eschewing fund of funds and investing directly in hedge funds. More than half the respondents said they now invested with more than 10 direct hedge fund managers, while 44 per cent said they invest with more than 20. Meanwhile, use of fund of funds declined, with nearly a third of respondents indicating that they used no fund of funds manager, compared to just over a quarter of respondents in the 2005 study.