IOSCO Publishes Report On Hedge Fund Valuation Principles

Dec 5 2007 | 7:54am ET

The International Organization of Securities Commissions recently published a final report recommending a global set of principles relating to the valuation of assets held by hedge funds. 

"The chief aim of the principles is to seek to ensure that a hedge fund’s financial instruments are appropriately valued and, in particular, that these values are not distorted to the disadvantage of fund investors. IOSCO believes that investors will ultimately benefit if hedge funds follow these principles," said Michel Prada, chairman of the IOSCO Technical Committee.

The nine principles contained in the final report are as follows:

1. Comprehensive, documented policies and procedures should be established for the valuation of financial instruments held or employed by a hedge fund.

2. The policies should identify the methodologies that will be used for valuing each type of the financial instruments held or employed by the hedge fund.

3. The financial instruments held or employed by hedge funds should be consistently valued according to the policies and procedures.

4. The policies and procedures should be reviewed periodically to seek to ensure their continued appropriateness.

5. A hedge fund’s governing body should seek to ensure that an appropriately high level of independence is brought to bear in the application of the policies and procedures and whenever they are reviewed.

6. The policies and procedures should seek to ensure that an appropriate level of independent review is undertaken of each individual valuation and in particular of any valuation that is influenced by the hedge fund’s investment manager.

7. A hedge fund’s policies and procedures should describe the process for handling and documenting price overrides, including the review of price overrides by an independent party (which may be a separate group within the investment manager’s organization).

8. A hedge fund’s governing body should conduct initial and periodic due diligence on third parties that are appointed to perform valuation services.

9. The arrangements in place for the valuation of the hedge fund’s investment portfolio should be transparent to investors.

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