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.

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.

Related Links

• Valuation Best Practices: Hedge Fund Investment Portfolios (via Mercer Capital’s Value Added, Volume 20, No. 2 [2008])
• The Use of ABX Derivatives in Credit Crisis Litigation (via NERA Economic Consulting)
• SEC Looking at How Alternative Funds Value Investments (via WSJ)

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About the Author

Sujan Rajbhandary

Sujan Rajbhandary, Senior Vice President, is a member of Mercer Capital’s Financial Reporting Valuation Group, which provides fair value opinions and related advisory services to public companies, private companies, and alternative investment vehicles. Sujan has valued .