In the eight years since the original guide was published in 2005, valuation practices across the hedge fund industry have adapted and evolved in response to an era of significant systemic financial stress, illiquidity as well as a series of regulatory changes and accounting-standard updates.
David Larsen, Managing Director, and Ryan McNelley, Director of Kroll participated on the steering committee which led a working group in the drafting of a variety of provisions within the document focusing on the valuation of illiquid “level 3” difficult-to-value securities.
The guide, previously published in 2005 and 2007, has been updated to take account of the changing landscape in the area of hedge fund valuation where hedge fund managers, hedge fund administrators, valuation specialists and investors operate. The new edition of the guide takes account of recent regulatory reforms, including a summary of the independent valuation requirements under the Alternative Investment Fund Managers Directive (AIFMD). The guide also reflects changes in accounting standards since the previous edition was published in 2007, such as the introduction of new international guidance on and disclosures of fair value accounting.
The guide contains 16 recommendations that reflect industry sound practices within the areas of governance; transparency; procedures, processes and systems; and sources, models and methodology. The guide also sets out the areas of hedge fund valuation that are now covered by regulation and those where discretion still applies.
Further, in light of the arrival of the Alternative Investment Fund Managers Directive (“AIFMD”) which came into force in July 2013, the guide includes a section which provides guidance on addressing the requirement for independence in how alternative investment fund managers perform the valuation function.