Valuation and transparency are difficult issues for investors in hedge funds. Nearly one-quarter of assets under management are in “hard to value” strategies, such as illiquid or complex assets, and hedge funds do not have to file reports on their financial performance to the SEC. In an industry effort to set its own standards, the International Organization of Securities Commissions (IOSCO) has released nine Principles for the Valuation of Hedge Fund Portfolios.
The principles cover techniques to strengthen the controls, oversight and independence of the valuation process and make the whole process more transparent to investors. Not surprising, they sound straight out of an SEC play book. To paraphrase: “document, document, document. Establish standards. Make them public. Stick to them. Review your actions regularly. If you veered, fix it or explain why.”
Whether or not these principles will make a difference depends on their voluntary use by hedge fund managers. Resulting valuations should be more appropriate and the principles should also be helpful for institutional and sophisticated investors in assessing the quality of the valuation framework within hedge funds. Read the nine principles.
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