The recent recommendations put forward in April 2008 by two private-sector committees established by the President’s Working Group on Financial Markets (PWG) call for much needed changes to valuation policies, disclosure, and accounting practices within the hedge fund industry. Industry experts agree that change is both necessary and imminent, but recognise the significant challenges when it comes to implementing a consistent, transparent and fair pricing methodology throughout the alternative investment management sector.
Hedge fund pricing has always been, at best, a highly inconsistent and unreliable process. The hedge fund industry has never been required to adopt a standard policy for valuing securities, especially the private, illiquid, and over-the-counter (OTC) asset classes. However, recent market volatility and mounting pressure from institutional investors has forced hedge fund managers to focus on the adoption of a standardised pricing and valuation methodology. More recently, the issue of pricing and valuation has escalated to Washington. The PWG has specifically issued recommendations for pricing hard-to-value assets, and has further recommended a formal pricing policy including increased disclosure, risk management guidelines, and operational best practices.
