FSA Issues HF Valuation Recommendations

The U.K.’s Financial Services Authority has forwarded to the International Organization of Securities Commissions a summary of recommendations on how hedge funds should be valued. In a letter to the Madrid-based IOSCO, the FSA suggested that HF managers split investment management from the back office duties; create a formal pricing policy that will explain how the fund determines valuations; and introduce procedures in the event that a firm opts to put part of its portfolio in side pockets, procedures that include informing the investor. In addition, the FSA recommended to IOSCO – which is set to release its own valuation guidelines in April – that on a regular basis hedge funds should reconcile their valuations with those performed by administrators and prime brokers. The FSA has made valuation and side letters its two most important hedge fund concerns, noting that hedge funds may be tempted to overstate valuations since performance and management fees are based on a portfolio’s net asset value. Its valuations concerns arise out of the closure earlier this year of London-based Regents Park Capital Management, which the FSA has said was the result of misevaluation of certain investments. The regulator, however, has not investigated whether the firm had violated any rules in the process.