Hedge Fund Valuation Standards: Evolution, not Revolution
The Bank of New York Mellon Corporation, Kinetic Partners
Introduction
The demand for alternative investments such as hedge funds is increasing dramatically. Institutional and retail investors alike are attracted to the investment opportunities offered by hedge funds and the prospects of higher returns, compared to traditional investment funds. However, in times of tighter credit and market volatility, all that glitters is most certainly not gold. It is becoming ever harder to generate alpha or, from an investor’s perspective, to pick a fund which will generate genuine alpha. The myriad of hedge fund managers, ranging from small boutiques to substantial departments within large asset managers and global investment banks, presents investors with a wide variety in both the quality of investment management and, importantly, in operational controls infrastructures.
Naturally, the recent volatility in the markets and the ensuing credit squeeze has benefited some hedge fund managers and their funds while making many funds suffer poor performance. Recent fund failures have once more brought operational risk to the fore. Some participants are arguing for increased regulation while others for self-regulation, by the promotion of sound or good practice. It was in this atmosphere that, in October 2007, the 14 leading European-based managers formed the Hedge Fund Working Group (HFWG) and issued a consultation paper proposing industry best practice in a number of operational areas.
