Hedge funds are front-page news, but unfortunately the news isn’t good—turmoil continues in the industry as Eton Park becomes the “latest hedge fund to fizzle,” as the New York Times puts it. Hedge fund valuation is challenging enough without this kind of chaos, speakers pointed out during a recent BVR webinar, Valuing Hedge Funds. Here are just a few of these challenges, according to Vladimir Korobov and Peter Rahe (both with Meyers, Harrison & Pia LLC) who conducted the webinar:
- Hedge fund valuation work presents some unique challenges; some include varying fund and fee structures;
- Use the DCF method; capitalized cash flow should generally be avoided—even in litigation;
- Critically review historical performance and assumptions underlying the expected investment returns of the funds; and
- Monte Carlo simulation can significantly enhance the forecast of assets under management (AUM) by enabling you to model variability of return and impact of variability on AUM and the firm’s value.
Monte Carlo, of course, is used in many other contexts in valuation. For those of you who are new to this method, John Elmore (Willamette Management Associates) will present a webinar, Monte Carlo 101: Start Modeling in Excel, on April 11.
Please let us know
if you have any comments about this article or enhancements you would like to see.