IOSCO Finalises Hedge Fund Valuation Principles

by Phillip Morton, Investors Offshore.com

21 November 2007

The International Organization of Securities Commissions (IOSCO) has released its Principles for the Valuation of Hedge Fund Portfolios.

The Principles describe techniques which should strengthen the controls, oversight and independence of the valuation process. They emphasize the importance of written policies which are implemented consistently and regularly reviewed.

According to IOSCO, these measures should strengthen the valuation process, thereby making it more likely that the resulting valuation is appropriate. The Principles may also be helpful for institutional and sophisticated investors in assessing the quality of the valuation framework within hedge funds, the Organization stated.

The principles follow the launch of a public consultation paper in March, which IOSCO prepared with extensive input from industry experts.

Michel Prada, Chairman of the IOSCO Technical Committee, commented:

"Hedge fund asset management techniques are utilized in all asset classes and across numerous jurisdictions. The valuation issues relating to investment portfolios and their importance, particularly in current market conditions, to existing and potential investors are the same across a wide range of jurisdictions."

He continued: "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."

The 9 Principles 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 financial instrument 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. The 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 Manager.

7. The policies and procedures should describe the process for handling and documenting price overrides, including the review of price overrides by an Independent Party.

8. The 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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