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AIMA publishes study on Asset Pricing and Fund Valuation in the Hedge Fund Industry


Date: Thursday, April 28, 2005
Author: AIMA

The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association, today announced the results of the first comprehensive global survey of hedge fund asset pricing and valuation practices. This survey was conducted by AIMA and sponsored by PricewaterhouseCoopers, Bisys, CITCO, Financial Risk Management (FRM) and Fauchier Partners. This survey 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, with particular emphasis on harder-to-value assets. The survey – “Asset Pricing and Fund Valuation Practices in the Hedge Fund Industry” – also includes recommendations for increasing the understanding of different approaches to pricing and valuation and enhancing existing practices and procedures within the industry. Among the key findings: 32% 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% of the aggregate value of the funds managed by respondents 73% of hedge fund respondents have an independent administrator to provide NAV; 65% of all respondents have a value error tolerance that their firm uses before re-calculating NAV; 93% of administrators are fully independent from the manager; There is a general desire to enhance valuation practices and procedures. AIMA Recommendations: “73% of hedge fund managers support focusing on pricing and valuation issues. We believe that this study highlights the fact that the industry is continuing to embrace enhancements in this area.” The main recommendations are: 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.