The Financial Services Authority (FSA) has today supported the paper released by IOSCO on the valuation principles that should be used by hedge funds in valuing their investment portfolios.
Dan Waters, FSA Asset Management Sector Leader and Chair of the IOSCO working group which drafted the valuation paper, said:
"Hedge funds are playing an increasingly important role in the international capital markets and we are pleased to support IOSCO in promulgating valuation principles which are applicable across all national boundaries. The paper addresses the issues of how effective controls may be placed around the valuation process to mitigate conflicts of interest, increase independence in sourcing and review of the resulting valuations.
"Developing the Principles alongside practitioners with extensive involvement in the hedge fund industry proved to be a very productive process for IOSCO. We very much appreciated the generous time and commitment given by industry experts. Their insight into effective valuation processes and open dialogue with regulators was invaluable."
The FSA recognises that hedge fund management techniques provide an important source of investment style diversification for institutional and sophisticated investors. Although not unique to hedge funds, some hedge fund strategies involve exposure to illiquid and complex financial instruments which can present valuation challenges, especially when used in conjunction with leverage. In an earlier discussion paper, "Hedge Funds: A discussion of risk and regulatory engagement", the FSA noted the scope for encouraging improvements in hedge fund valuations by cooperation in an international context.
The paper is open for public consultation. The closing date is 21 June 2007.
