Pension Risk and Hedge Fund Cherry Picking
An October 9, 2007 Wall Street Journal article describes new academic research that suggests foul play in hedge fund orchards everywhere. In "Pricing Tactics Of Hedge Funds Under Spotlight: Some Managers Select Favorable Valuations To Lift Performance," reporters David Reilly and Gregory Zuckerman cite empirical evidence that hedge fund managers may cherry pick prices of "hard to value" instruments as a way to pretty up performance.
The issue of valuing instruments for which no ready market exists is a challenge indeed. At a time when pension funds are allocating billions of dollars to hedge funds, private equity and venture capital pools, fiduciaries risk serious fallout if they fail to establish solid ground rules regarding valuation. There are any number of "must have" elements that comprise effective policies and procedures. Ignore them and plan sponsors lose a precious opportunity to detect possible trouble before things get out of hand.
Now is not the time to take shortcuts when it comes to valuing "hard to value" instruments or conducting proper oversight of portfolio managers who trade relatively illiquid stocks, bonds, derivatives and hybrids.
If you are interested in reading other posts about valuation, click on any of the links provided below. In addition, feel free to email us if you want to read some of our many articles on the topics of risk management and valuation.
Valuation Problems Are Going to Cost Plan Sponsors Big Time
Model Risk - Great Unknown for Pension Plans
Valuation Awakening - Does the Emperor Have Clothes?
Tulip Craze Redux and What Models Mean to Pensions
Survey Shows that Pensions Worry About Risk Management and Valuation
Pensions and Hedge Funds and Private Equity - Assessing Risks
Hedge Fund Toolbox - Webinars for Pension Fiduciaries
Courts Want Evidence of Valuation Expertise
