A fortnight ago, two private-sector committees set up under the auspices of the President’s Working Group on Financial Markets released sets of best practice in the US for the hedge fund i
A fortnight ago, two private-sector committees set up under the auspices of the President’s Working Group on Financial Markets released sets of best practice in the US for the hedge fund industry and its institutional investors. While the changes suggested in the reports are self-regulatory in nature, the groups argue that they are necessary to limit systemic risk, foster investor protection, and set standards for the oversight of hedge fund investments.
The report of the hedge fund industry committee highlighted five areas of business practice that hedge fund firms need to focus on – disclosure, valuation, risk management, trading and business operations, and compliance, conflicts and business practices.
Critics of the reports may well doubt whether self-regulatory standards are likely to be implemented on a large scale. Hedge fund managers are hardly going to ‘disclose’ investment strategies, as the industry report recommends, because that is how they make money. And many hedge fund executives believe they are sufficiently regulated already in the areas of risk management and the handling of conflicts of interest.
However, an interesting point in the industry report involves the accurate valuation of assets. While many hedge funds have accurate measures of valuation, the concern might be that there is no valuation standard in place. Valuation is important because it brings in consistency and, more importantly, additional investors – the fund of funds due diligence checklist always has a mention of correct pricing and valuation.
Aima and the Managed Funds Association in the US have already come out with proposals on valuation standards, although they vary slightly. But whether or not they will become ‘standards’, however, is anybody’s guess.
