How Many Hedge Funds Have Valuation Processes?

Business Valuation Resources and Pension Governance, LLC just completed a joint survey on business valuation firms that currently provide valuation services to hedge fund clients. It appears that relatively few hedge funds are reaching out to the business valuation profession, despite regulatory and legal pressures to improve valuation practices. Some highlights are summarized below:

• Of the few survey respondents who currently provide services to hedge funds, appraisers say that 55% of their clients have a formal valuation process in place.
• Appraisers who took the survey say that almost half of their hedge fund clients generate valuation numbers internally. A quarter of their clients rely on third party administrators. Relatively few used certified business appraisers.
• Many reasons were given by appraisers as to why hedge funds procure a valuation. These include, but are not limited to: auditing (33% of respondents), asset allocation (27%) and performance reporting (24%), redemption (18%) and risk management (18%).
• Eight out of 10 appraisers with hedge fund clients say they’ve never been called in to assist their hedge fund clients with the development of a valuation policy.
• When asked about standards (guidelines), 48% of survey respondents claim their clients cite fair value accounting rules, 23% of respondents say their hedge fund clients use no standards and 23% of survey-takers cite the Private Equity Industry Group Guidelines [PEIGG] as a guide for their hedge fund clients.
• For those survey respondents who choose not to pursue hedge fund valuation work, appraiser liability is cited as the primary deterrent (77% of respondents), followed by 54% of survey-takers who say they are unfamiliar with the hedge fund industry.

Editor's Note: Thirty-nine persons answered the survey. Additional research is underway.

Comments

[Bill Herbert:]

In my view, hedge fund "valuations" have been a joke for years.

The hedge fund community has a huge fraud problem on its hands, and it wants it quietly swept under the rug.

That's one reason why so many funds suddenly implode - in actuality, they have been taking high marks for years to stay in business. Then when things get really bad, they announce a terrible quarter, and disappear.

That phenomenon also corresponds with the enormous popularity of OTC derivatives - where the 'value' of your custom-negotiated, non-exchange-traded, hidden-in-your-desk-dr... security is - whatever you want it to be to make your month appear to be profitable. That keeps investors from exiting, and keeps you collecting those fees - which is basically what the average HF manager has become - a fee collector.

I predict a HUGE blowout in the coming months - I frankly can't believe the auditors have been passing on some of this crap for the past year or two. There must have been some big fees paid at 12-31-07 to keep some funds alive through bogus audits. It is completely ludicrous and 100% impossible that most funds made money last year - BUT THAT"S WHAT THE INDUSTRY STATS and the 'audits' showed.

Now the truth cannot be hidden. People don't want to go to jail and end up as Andy Fastow's cellmate.

This year-end is going to be the curtain call for hundreds, if not thousands, of flaky funds.

2008 Sep 11 10:39 PM