Wednesday, July 19, 2006


Ode to Valuation



According to Oscar Wilde, a cynic is "a man who knows the price of everything and the value of nothing." In today's world, that could be a label that some pension fiduciaries end up wearing with regret. At a time when pension funds are allocating more and more money to alternative investments, assessing their value and understanding why (and how) the value is likely to change is paramount.

Could hedge fund regulation help to shed light on valuation practices? We may never know.

Just a few weeks ago, the D.C. Circuit Court of Appeals vacated a rule that required hedge fund managers to register, pursuant to the Investment Advisors Act of 1940. Wall Street Journal reporter Kara Scannell describes that, in the aftermath, "10 managers have filed papers to withdraw from registration." Whether this is good or bad depends on a host of factors. However, critics are likely to cite registration shyness as a step backward with respect to better understanding how hedge funds value their positions. While some funds report net asset values on a daily basis, others don't because they trade instruments for which there is no ready market or trading occurs infrequently.

As written before, this creates its own set of problems. (See the June 18, 2006 posting about hedge fund valuation.)

This blog's author, an Accredited Valuation Analyst, CFA charterholder and certified Financial Risk Manager, writes about the topic of hedge fund valuation, and the fiduciary implications, in two new articles.

Write to pension@bvallc.com if you would like a copy of either or both articles:

1. "Hedge Fund Valuation: What Pension Fiduciaries Need to Know" (Journal of Compensation and Benefits, July/August 2006)

2. "a growing necessity for hedge fund valuation" (HFMWeek.com, June 29-July 5, 2006).

Incidentally, any concerns about transparency and valuation can rightfully be said to apply to private equity and venture capital funds as well. Future blog postings will look at these other types of alternatives.
posted by Susan Mangiero at 7/19/2006 11:17:00 PM