Pricing potholes

As institutional investors pour more capital into hedge funds in their search for better returns, the valuation of credit derivatives and other complex financial instruments has emerged as a major risk management issue for all parties involved.

Pension funds and other investors are increasingly looking for more exotic and illiquid securities in the face of fair to middling equities markets. But although the hedge fund community is more than willing to meet the demands of this upsurge in business, a growing number of funds need to contend with their new clients’ demands for better investment and risk transparency along with their investment capital.

How funds price their instruments is no exception, although institutional investors and