In the aftermath of more than a few blowout hedge fund losses, regulators, investment fiduciaries, and compliance officers are paying close attention to hedge fund valuation practices. As recently asJune 2006, U.S. SEC Commissioner Roel C. Campos described the urgent need for accurate and unbiased valuation numbers, adding that, “A key element of monitoring the risk of hedge funds is tounderstand the valuation used by said funds and counterparties to the funds.” It doesn’t stop there. Proper asset valuation is a cornerstone of the investment management process. Without goodnumbers, it is virtually impossible to make meaningful decisions about asset allocation, portfolio re-balancing, risk control, and manager evaluation. The challenge is especially relevant asendowment, foundation, and pension fiduciaries commit billions of dollars to hard-to-value instruments.
While hedge funds (and funds of funds) potentially offer benefits, the costs can be high. Lack of transparency, valuations performed by persons other than independent, trained appraisers, andrelative illiquidity compel the need for investors to ask tough questions about mark-to-market models, practices, and procedures. For multi-strategy funds, the challenge is more acute.
