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Iosco finalises principles for the valuation of hedge fund portfolios

The International Organisation of Securities Commissions has released its principles for the Valuation of Hedge Fund Portfolios, following the launch in March of a public consultation paper on valuation principles prepared by Iosco with extensive input from industry experts.

'Hedge fund asset management techniques are utilised in all asset classes and across numerous jurisdictions,' says Michel Prada, chairman of France's Autorité des Marchés Financiers and of the Iosco technical committee.

'The valuation issues relating to investment portfolios and their importance, particularly in current market conditions, to existing and potential investors are the same across a wide range of jurisdictions.

'The chief aim of the principles is to seek to ensure that a hedge fund's financial instruments are appropriately valued and, in particular, that these values are not distorted to the disadvantage of fund investors. Iosco believes that investors will ultimately benefit if hedge funds follow these principles.'

The principles describe techniques designed to strengthen the controls, oversight and independence of the valuation process. Prada says they emphasise the importance of written policies that are implemented consistently and regularly reviewed.

'These measures should strengthen the valuation process thereby making it more likely that the resulting valuation is appropriate,' he says. 'The principles may also be helpful for institutional and sophisticated investors in assessing the quality of the valuation framework within hedge funds.'

The nine principles are:

  1. Comprehensive, documented policies and procedures should be established for the valuation of financial instruments held or employed by a hedge fund.
  2. The policies should identify the methodologies that will be used for valuing each type of financial instrument held or employed by the hedge fund.
  3. The financial instruments held or employed by hedge funds should be consistently valued according to the policies and procedures.
  4. The policies and procedures should be reviewed periodically to seek to ensure their continued appropriateness.
  5. The governing body should seek to ensure that an appropriately high level of independence is brought to bear in the application of the policies and procedures and whenever they are reviewed.
  6. The policies and procedures should seek to ensure that an appropriate level of independent review is undertaken of each individual valuation and in particular of any valuation that is influenced by the manager.
  7. The policies and procedures should describe the process for handling and documenting price overrides, including the review of price overrides by an independent party.
  8. The governing body should conduct initial and periodic due diligence on third parties that are appointed to perform valuation services.
  9. The arrangements in place for the valuation of the hedge fund's investment portfolio should be transparent to investors.

In July Iosco published responses to the technical committee's consultation report on principles for the valuation of hedge fund portfolios. The committee, a specialised working group established by Iosco's executive committee, is made up of 15 agencies that regulate some of the world's larger, more developed and internationalised markets and aims to review major regulatory issues related to international securities and futures transactions and to co-ordinate practical responses to these concerns. Iosco's membership regulate more than 100 jurisdictions accounting for more than 90 per cent of the world's securities markets.

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