Thirty-two percent of respondents in a global hedge fund survey believed the pricing of illiquid instruments was the most significant challenge in portfolio valuation. The survey, conducted by the Alternative Investment Management Association (AIMA) on asset pricing and fund valuation practices, suggests the industry should encourage a more consistent approach in evaluating such instruments to increase transparency and investor confidence.It also found that hedge fund managers considered 14% of assets managed to be 'hard to value', consisting of strategies in long-dated convertible arbitrage, distressed securities, emerging markets and mortgage-backed securities, among others. In addition, 73% of respondents used an independent administrator to provide net asset value (NAV) figures, while 65% use a value error tolerance in their pricing before recalculating NAV.
“We believe the results of this research will be a useful resource for hedge fund managers and investors,” said Segun Aganga, chairman of the AIMA research committee, pointing out that the survey was an ongoing exercise and represented a first important step to establishing a dialogue on 'best practice' in the industry.
To achieve the desired transparency, AIMA recommends the documentation and regular review of practical pricing and valuation practices, with explicit descriptions of their potential limitations. The association also believes any decision to use a pricing model rather than a market price in determining asset value should be justified, while NAV calculations should be subject to “appropriate” checks and balances to ensure sufficient transparency.
AIMA’s global survey was answered by 76 institutional investors, managers and service providers such as prime brokers and administrators, combined with a further 16 qualitative interviews.
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