That’s how Dr. Susan Mangiero AIFA, AVA, CFA, FRM, described the business valuation opportunities in the hedge fund industry to an attentive crowd at last week’s Introduction to Hedge Fund Valuations at the NACVA conference in Las Vegas. In this relatively new industry, she warned that valuing hedge funds “can bring about a lot of liability to third parties such as appraisers” but offers “a good opportunity if you’re comfortable with the risks.”
There are 9,000+ hedge funds around the world, many in great need of help with valuation issues. New regulations and accounting rules encourage or mandate the use of a third party to price a portfolio (or components thereof). Other situations such as divorce, succession planning or partnership disputes, require a valuation of the business itself. Other hedge fund managers need input in order to effectively develop and implement valuation policies and procedures.
Regardless of the scope of work, hedge fund valuation work presents some unique challenges, particularly the following four items. First, hedge fund strategies are diverse and sometimes described as arcane, especially when derivative instruments are present, directly or as part of complex securities. Second, hedge fund structure varies, often established as an offshore entity. Third, many hedge funds are loathe to disclose position details or have outsiders spend time with traders or key investors. Fourth, hedge fund benchmarking information is not created equal and requires careful analysis.
As with other BV techniques, it’s important to rely on data that’s properly matched to the subject industry, consists of an adequate sample size, and is of high quality and current to your engagement. Valuation is integral to proper risk management. As more pension plans, endowments and foundations invest in hedge funds, the business valuation professional has an opportunity to help managers and investors alike by (a) raising the “best practices” bar, (b) adding discipline to the appraisal process and (c) encouraging the mitigation of operational, financial and compliance risks.
Want to win an iPod Nano loaded with your choice of three BVR teleconference recordings? In an effort to further develop thought leadership in the area of hedge fund valuation, we’d appreciate a few minutes of your time in answering a 15-question survey developed by Dr. Mangiero. Whether you are already involved in hedge fund and derivative instrument valuation work or are interested in learning more about this important area, we’d love to get your input. Your responses will be used to better focus information to assist business valuation professionals who work (or want to work) with hedge funds. Click here to take the survey. (If you experience any difficulty, copy and paste this URL into your browser’s display line – http://www.zoomerang.com/Survey/?p=WEB227VRUND29S). The drawing for the iPod Nano winner will be held on July 1st.
For more information on hedge funds, you may want to visit sites such as www.hedgeworld.com, www.hedgeco.net, www.pensionriskmatters.com (click on the Hedge Fund and Valuation folders on the left hand side), www.pensiongovernance.com, or www.seekingalpha.com.