Mercer Capital's Financial Reporting Blog

Valuation Best Practices for Alternative Investment Funds

Concerns regarding valuations of portfolio holdings of alternative investment vehicles, including hedge funds, are not new. Broadly recognized valuation best practices comprise three components:

  • Valuation policies and procedures that establish methodologies for various classes of investments, specify personnel to be involved in the valuation process, address effective alleviation of potential conflicts of interests, and provide for appropriate disclosure.
  • A governance mechanism (valuation committee) that is reasonably independent from the direct influence of portfolio managers and trading personnel.
  • Qualified valuation professionals, including inside or external specialists as appropriate, who contribute to the implementation of the valuation policies and procedures.

A number of suits against a variety of investment management funds in the aftermath of the 2007-08 credit crisis were based on alleged deficiencies regarding valuation processes and practices. More recently, valuations of hedge fund portfolio investments have come under the ambit of SEC scrutiny owing to the changes ushered in by the Dodd-Frank statute promulgated in 2010.

In general, investors in alternative investment vehicles could benefit by heeding disclosures regarding the valuation and reporting of portfolio investments, including:

  • Extent of valuation inputs from portfolio managers.
  • Composition of valuation committees charged with overseeing valuation policies and procedures, and related disclosures.
  • Consistent adherence to appropriate and generally accepted valuation methodologies, especially for illiquid and/or hard-to-value assets.

Over the years, Mercer Capital has assisted a range of alternative investment funds in determining the fair value of portfolio assets both as part of normal operations (and reporting), as well as within a litigated context. Portfolio holdings we evaluate range from investments in start-up companies by venture capital funds to illiquid instruments held by hedge funds and business development companies. Call us – we would like to work with you to define appropriate fund valuation policies and procedures, and provide independent opinions of value.

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Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly.