The continuing existence of myriad conflicts of interest in the era of new age finance represents a fly in the ointment for those who believe, as Fed Chairman Ben Bernanke apparently does, that a "light regulatory touch" and a market-based approach are all that are necessary to maintain financial stability.
In reality, a lack of transparency, assymetric incentives, and intense competitive pressures that have led many people to shoot -- er, invest -- first and ask questions later have engendered a great deal of untoward and ultimately destabilizing behavior.
Consider, for example, an asset class that has grown by leaps and bounds and that has made no small number of advisors rich on the back of valuations that might have been, to put it mildly, somewhat suspect. In "Hedge Fund Valuations ‘Problematic’ Say Investors," ICFA Magazine identifies an issue that will likely have unwelcome consequences once the systemic leaks begin to spring in earnest.
Nearly two thirds (64 per cent) of institutional investors say that accurately valuing their hedge fund holdings is problematic, according to a new report issued by State Street.
Of those who expressed concerns about the pricing of hedge fund investments, 53 per cent said they were worried because the fund’s general partner was solely responsible for the valuation, while 47 per cent said they were concerned that their hedge fund managers did not employ an independent administrator.
The State Street study argues that mounting pressure regarding valuation is now prompting investors to insist on independent pricing. The possibility of attracting new assets from pension plan sponsors covered by ERISA could also lead more hedge fund managers to adopt independent valuations in the US, according to the report.
In the UK, regulatory and industry initiatives to raise standards for hedge fund valuations have been in the works for years, with the FSA recently throwing its weight behind a set of hedge fund valuation principles developed by IOSCO. The Alternative Investment Management Association also issued a best practice guide on valuations last month.
Despite these concerns the report reveals a booming industry. Nearly two-thirds of institutional investors are now allocating more than 5 per cent of their portfolios to hedge fund strategies, while only 4 per cent have no allocation at all. By contrast, 16 per cent said they had no allocation in the 2006 study.
Everybody into the pool?
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