AIMA this week released the results of the first comprehensive global survey of hedge fund asset pricing and valuation practices.
The survey, entitled "Asset Pricing and Fund Valuation Practices in the Hedge Fund Industry", 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.
It 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.
Segun Aganga, Chairman, AIMA Alternative Investment Research Committee, said: "This research is the result of the Industry's commitment to ensure that investors' interests are protected, as well as a desire by the industry to continue to improve its practices. I am proud that AIMA has been able to lead the first global survey of this kind containing the views of principal industry participants including investors, hedge fund managers and service providers."
He added: "We believe that the results of this research will be a useful resource to hedge fund managers and investors. It is an important step in the development of the most sound industry practices to value hedge fund assets."
Aganga said: "Based on the findings of this survey, we have made several practical recommendations. They are designed to increase the common understanding of approaches taken to pricing and valuation, and enhance existing practices and procedures within the industry."
"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.
Background Note: AIMA's Alternative Investment Research Committee generated a detailed questionnaire, which was issued globally to institutional investors, managers and service providers (including prime brokers, administrators and auditors). This was followed up with interviews with investors and industry participants in various parts of the world.
Complete responses received during the course of the survey amounted to 76 questionnaires and 16 qualitative interviews, totaling 92 organisations that collectively manage USD 58 billion and invest/allocate USD 72 billion. It is important to note that the administrator responses represent more than half the industry's assets at USD 420 billion. The geographical locations of respondents did not precisely match the spread of the industry. The US hedge fund industry, for example, is under-represented, thus skewing response rates from the European and Asia-Pacific regions.