Hedge Fund Administrators and Asset Valuations

Hedge Fund Administrators and Asset Valuations - The...

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Hedge fund administrators and asset valuations – does it all add up? Harry McVea School of Law, University of Bristol, Bristol, UK Abstract Purpose – The 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/approach – The 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. Findings – The 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/value – The 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. Keywords Hedging, Fund management, Asset valuation Paper type Viewpoint 1. Introduction Despite recent financial market disruption, the global hedge fund industry continues to grow at an impressive rate, with assets under management set to top the US$2 trillion mark by 2009 (Celent Report, 2006, p. 2) Europe’s share of this growth is also set to increase, from 27 per cent of global assets under management in 2006 to 35 per cent by the end of the decade (Celent Report, 2006). Although most offshore hedge funds are domiciled in places such as the Cayman Islands, the British Virgin Islands, and Bermuda, Europe (and in particular London) has established itself as a location for hedge fund managers[1], building on its skills base, innovative markets, and reputation for competence and honesty. Meanwhile, Ireland has successfully established itself as a leading center for hedge fund administration. Indeed, as of June 2005, Irish-domiciled administrators serviced in excess of 3,000 hedge funds, representing assets of almost US$0.5 trillion – approximately a quarter of global assets under management, and about 50 per cent of European Union hedge fund assets under management (Report of the Alternative Investment Expert Group to the European Commission, 2006, p. 14). Despite the fact that the exact nature of the functions carried out by hedge fund administrators depends upon the terms of the agreement between the administrator and the hedge fund (represented by its governing body), in essence administrators provide a variety of “back-room” or operational, functions associated with hedge fund activity. These include, but are not limited to: maintaining fund accounts and records;
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  • Spring '11
  • Plescia
  • hedge fund administrators

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