WEST PALM BEACH, FL (HEDGECO.NET) – William Donaldson, Chairman of the Securities and Exchange Commission, has continued to defend his plans to subject US hedge funds under his regulatory oversight.This time the SEC Chairman takes issue with hedge fund pricing methods; according to Donaldson, this matter will be a key focus area for the SEC to look into.
Part of the problem involved with hedge fund pricing, deals with the issue that many securities have thin trading volumes, and often illiquid. Many other securities are often traded over the counter, while some may also fall in the category of asset-backed issues. These complexities tend to make the pricing of such securities problematic.
Donaldson said, “The pricing of hedge fund shares is clearly an issue, especially given the compensation.” A risk manager at Capco firm said, “We have found numerous occasions where, on the back of poor investment performance, managers ‘modified’ the valuation of their funds . . . to buy time until actual results hopefully improved.”
The pricing issues have been around for quite sometime. In 2002, Kenneth Lipper, an established manager with strong ties in political and entertainment circles, slashed the value of his hedge fund portfolio by about $315 million, blaming losses in the convertible-bond market, the recession, the terror attacks, and Enron Corp�s collapse.
According to manager Lipper, those losses were incurred in two portfolios; Lipper Convertibles, L.P., and Lipper Offshore convertibles. The two portfolios were subsequently closed with huge losses to investors in those funds.
It is still unclear how the SEC will handle the hedge fund pricing matter, but remarks by Chairman Donaldson on this problem helps to point to the direction which the financial market regulator will proceed once its hedge fund regulatory proposals are approved.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: [email protected]
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