Hedge Fund Valuations Under Scrutiny—Risk.net

US Securities and Exchange Commission (SEC) is Aggressively Policing Fund Valuation Practices in the Hedge Fund Industry    

Kris Devasabai at Risk.net reports that hedge funds, under pressure from regulators and investors, are establishing robust pricing policies for hard-to-value assets.  They are also hiring independent experts to price complex and illiquid assets as investors and regulators intensify their scrutiny of valuation practices.     Here’s more: 

“Valuation is a huge reputational risk,” says Cyrus Borzooyeh, chief financial officer at Reservoir Capital Group, a hedge fund that invests in public and private markets.  The practice of hiring a fund administrator to essentially “rubberstamp the manager’s [pricing] model is no longer acceptable” for regulators or investors, adds Borzooyeh, who was speaking on a panel at the GaimOps conference in the Cayman Islands.

The [SEC’s] asset management unit is focused on detecting fraudulent or weak valuation practices, including lax valuation committees and the use of side pockets to conceal losing illiquid positions, and the failure to follow a fund’s stated valuation procedures.   In a speech in December 2012, Bruce Karpati, the head of the SEC’s enforcement division’s asset management unit (AMU), made it clear the regulator views fair and independent pricing as an important issue. “The AMU is focused on detecting fraudulent or weak valuation practices, including lax valuation committees and the use of side-pockets to conceal losing illiquid positions, and the failure to follow a fund’s stated valuation procedures.”

These days hedge funds need to have independent pricing agents and a carefully thought-out policy for valuing level 3 assets, which are defined by the Financial Accounting Standards Board (FASB) as securities for which a fair value can only be calculated with models that require “unobservable” inputs, according to Borzooyeh.

Find out more by reading the whole piece. 

Risk.net: Hedge Fund Asset Pricing Should be Established Independently