Fund management advisory firm Carne Global Financial Services has launched its Hedge & Traditional Fund Valuation ‘Best Practice’ Product, which is aimed at assisting hedge fund, private wealth and traditional asset managers in following valuation best practice across all asset classes and products.
Carne Global claims that these best practices will help fund managers to deal with increasing risk and complexity of the valuation process, particularly with complex and illiquid instruments. It is a tool for improving transparency in fund governance, says the advisory firm, and it encompasses valuation policy, terms of reference for valuation committees and marketing summaries.
Sunil Chadda, head of alternative investments at Carne Global, explains: “We saw the release of the Alternative Investment Management Association (AIMA) best practice guidelines last year and we were working on pricing and standards at the time and so we decided to adopt the standards as we went along. We decided to continue to adopt industry best practices as and when they came out and, over the space of the last year, there have been reports from the various associations including the Hedge Fund Working Group (HFWG) and we have incorporated those standards also.”
As well as HFWG’s recommendations, the product incorporates the recommendations of the US President’s Working Group, the European Funds and Asset Management Association (EFAMA), the International Organisation of Securities Commissions (IOSCO) and accounting standard FAS 157.
“We knew valuation was a problem hot spot and the timing of the launch this year has been brilliant,” says Chadda. “We have run the product twice so far and the feedback has been very positive.”
The valuation product focuses on either a specific fund or the manager’s entire fund range and analyses the holdings and the key risks involved, with an emphasis on complex and illiquid instruments. It documents how the administrator and manager each price the portfolio, as well as how and where counterparty, prime broker and third party prices are used, while also addressing issues around side pockets.
Carne Global’s product is aimed at allowing the clear identification of pricing roles, responsibilities and segregation and the identification of pricing sources. It defines controls and reporting procedures and allows for the reporting to asset manager valuation committees and boards. Chadda explains the implementation process for clients: “We go to a hedge fund manager, a private wealth fund manager or an asset manager and we talk with the client to decide the scope. It can be for one fund or across a number of funds – it is better to go across a number of funds because if there is an OTC derivative that is held by a number of the funds, then it is valued the same way across all of them. Internal consistent pricing is very important.”
Carne Global then looks at all the legal and other documents relating to the fund, such as SLAs, and make sure that it is all consistent and accurate. “We would then gap it to the HFWG recommendations on valuation and produce a gap document, including an instrument pricing matrix for every instrument type in the range of funds. We would document the price sources for all levels of instruments and compare pricing tolerances between sources. We also look further down at gapping the manager against the recommendations – we produce a document outlining the issues – where the risks are and whether they are minor or major and leave the client to decide which issues they wish to address and we help them do that.”
OTC derivatives was a challenging area, says Chadda: “Especially where the portfolio is holding an OTC derivative and you have to price it via a counterparty price and that is the only price you can get in the market. That is a gap area and something that we have done to solve the problem is when a manager runs this product with us and we have the deliverables, further down that space we have looked at a high number of pricing services available out there in the market. If someone came up to us tomorrow and said that they have an OTC derivative in their portfolio and they only have one price but need to get more, we know a number of places where to get those prices.”
The product also covers esoteric assets, including especially difficult to price assets such as biofuel farms. “One particular client had just bought a biofuel farm and it was another year until the crops would come in and we found someone that could price it. We have looked at most assets and tried to find logical places in the market to be able to price them,” he says.
Chadda reckons that there has been “slack” take up of the HFWG’s recommendations thus far, and adds that the valuation piece is just one part of these recommendations. “This product from Carne takes care of that piece and we have also been looking at the other areas that the recommendations cover and we will be extending to that space very soon,” he adds.
Out of the HFWG’s recommendations, the number one hot topic is evaluated prices and number two is the risk management process, explains Chadda. “There are lots of hedge funds still digesting these recommendations and a lot of bodies only produced their consultation documents on them last week so it is a slow process of adoption so far. The level of interest is beginning to rise.”