Hedge fund administrators and asset valuations – does it all add up?

Abstract

PurposeThe purpose of this paper is to assess the role of hedge fund administrators, particularly in relation to valuing complex and/or illiquid financial instruments.Design/methodology/approachThe paper proceeds by way of an analysis of key trends and developments within the hedge fund administration industry in relation to the regulatory challenges posed by complex and/or illiquid instruments.FindingsThe paper argues that, because of inherent problems over the attribution of value to complex and/or illiquid assets, emphasis on independent valuation by administrators is largely misplaced. Recent events concerning valuation difficulties in the subprime mortgage market illustrate these very concerns.Originality/valueThe paper questions the ability of independent hedge fund administrators to provide reliable valuations for complex and/or illiquid instruments. Independent valuation of such assets suggests a level of scrutiny that is in fact not present. Moreover, the financial market meltdown surrounding the collapse of the subprime mortgage market provides a timely and salutary reminder that independent valuations of complex and/or illiquid instruments are inherently unreliable.