U.K. Hedge Funds Unaware Of Valuation Best Practice

Mar 25 2008 | 12:40pm ET

There is a lack of consensus about enforcement of standards on the part of U.K.-based hedge funds, according to new research.

The report by Kinetic Partners and the Bank of New York Mellon shows that despite the ongoing credit crunch, more than half of U.K.-based hedge fund managers have little or no awareness of the Alternative Investment Management Association’s recommendations on hedge fund valuations.

Specifically, hedge funds managers across the pond were “confused” about AIMA’s recommendations and feel that they haven’t had a clear impact on the industry. The managers who were against further regulation in this area said that AIMA does not have jurisdiction to set binding rules, and that the cost of implementing these alongside the existing mandatory requirements, could damage the attractiveness of the U.K. as a center for investment managers.

But despite the lack of awareness, over 81% said that better governance of hedge fund valuation would be beneficial to improve the standing of alternative investments among institutional and private investors. As a result, nearly two-thirds of the respondents say they’ve already implemented one or more of AIMA’s recommendations prior to their publication.

And while hedge funds were almost evenly divided as to whether AIMA’s recommendations should or should not be enforced by regulators, the report shows that enforcing sound practice through regulation might not prevent the next market crisis.

David Aldrich, managing director at BNY Mellon, said the report highlights the fact that it is not possible or practical to set rigid valuation standards that work for all parties given the different strategies and complex products that exist in the hedge fund industry.

“If self-regulation is to be effective, it is essential that best practice is understood and applied,” he said.

“Because many hedge funds invest in illiquid, hard-to-value and esoteric instruments, it is vital for investor confidence and protection that hedge funds implement robust standards for valuing their holdings,” Julian Korek, a founder member of Kinetic Partners, said.

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