Inconsistent valuation methods by fund managers across the hedge fund industry can often lead to wide discrepancies in the value of the same security in different hedge funds, according to research by LJH Global Investments.
Consequently, this may have serious implications for investors when it comes to the level of returns received warns James Hedges, president and chief investment officer at LJH Global Investments.
"There is a broad spectrum of how a hedge fund manager can value holdings and the universe represents some counter-intuitive surprises," Hedges stated in a teleconference as he explained the firm's findings.
“We are still a long way from the consistent application of procedures,” he added.
Hedges said that one example of how differences in valuation can arise is from fund managers relying on deal quotes from trades in relatively illiquid markets.
He urged investors to be aware of this issue when considering an investment into a hedge fund, recommending that potential investors examine closely the valuation methods used by managers in the fund and check to see if those procedures have been followed.
The research results were based on a review of more than 100 hedge fund audits.
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