The Importance of Valuation Policy

Timothy Peterson

It may seem unconventional to have a discussion of valuation in a performance measurement book, but, as valuation is of utmost important to the integrity of performance results, it is the perfect capstone. It is said that, in performance measurement, if the benchmark is wrong, all else that follows is wrong. In the realm of alternative investment strategies, which often lack for both comparable benchmarks and objective valuations, it can be said that, if the valuation is wrong, all else that follows is wrong.

The aim of this chapter is to do three things. First, we introduce some principles governing the practice of valuation, as a refresher for the initiated and an introduction for the novice. Second, we discuss cheating in valuation practices, some of which is motivated by the subjective nature of valuation itself, and some motivated by human nature. It is from these examples we can understand why discipline and ethics in valuation policy is of utmost importance. Last, we give some suggestions on how to implement a valuation regime that promotes transparency, integrity and confidence in the results.

DOES VALUATION POLICY MATTER?

One of the key provisions of the Dodd