The hedge fund industry lacks consistently applied pricing standards and methodologies that are needed to improve transparency of fund pricing and valuation, according to a research paper
The hedge fund industry lacks consistently applied pricing standards and methodologies that are needed to improve transparency of fund pricing and valuation, according to a research paper exploring trends in the pricing and valuation of complex portfolios.
The study, entitled Hedge Fund Portfolio Pricing Best Practices, was commissioned by hedge fund industry solutions provider Paladyne Systems, news and data provider Thomson Reuters and NumeriX, a provider of advanced analytics for the derivatives and structured products market.
Predicts an industry shift toward standardisation of pricing and valuations methodologies, the paper calls on the industry to come together in a constructive and helpful manner to define consistent pricing and valuation standards that the industry can embrace and regulators will, ultimately, enforce.
‘For today’s hedge fund, there are no standard pricing methodologies that are consistent across the industry,’ says Paladyne chief executive Sameer Shalaby. ‘As such, two different hedge funds could price exactly the same portfolio differently – both considered correct and fair.
‘The challenge for hedge funds and the industry at large is to establish standard pricing methodologies across all asset classes, first-generation pricing policies, and robust infrastructure and operational processes.’
Gerard Buggy, global head of hedge funds at Thomson Reuters, says: ‘The President’s Working Group made significant and timely recommendations in April for hedge funds to bring their business practices up to par in all areas, including valuations, but ultimately placing that responsibility on the managers.
‘However, truly responsible pricing and valuation can only be achieved through the collaborative efforts, process and policies of not only hedge fund managers but fund administrators, prime brokers, analytics and data vendors and technology solutions providers – all of which have a role to play in an industry-wide solution.’
Steven O’Hanlon, president and chief operating officer of NumeriX, adds: ‘The industry is at a juncture where regulation is anticipated. The first step toward resolving inconsistent pricing and valuation is for the industry to take on the task of defining consistent pricing policies and methodologies that would have universal application and, in effect, become law. These standards should be led by the industry and come as a result to regulation.’
