Hedge funds clash over question of value
Bitter disputes are developing behind the scenes in the hedge fund industry about the way funds are valuing some assets for their end-of-month performance reports – and these tensions could delay awaited performance reports on the net asset value (NAV) of hedge funds’ portfolios in July, says Gillian Tett, the FT’s capital markets editor.
In particular, the recent violent swings in the credit markets are making it unusually hard for some funds to agree the value of these assets with their administrators, particularly in sectors linked to assets such as subprime mortgages, says Tett.
That may mean investors in hedge funds that do issue monthly NAV reports will be forced to wait longer than usual for the July reports.
It may even form fertile ground for future lawsuits, as sharp differences in the perceived value of hedge fund portfolios could influence investor confidence, notes Tett.
“There is a lot of wrangling going on behind the scenes, because it’s getting hard to agree [about] how to value a lot of stuff,” one US banking official told Tett. “The bid-offer spreads can be incredibly wide - and that can really affect the NAV.”
The data on funds’ NAV for the end of July is currently awaited with particular eagerness by many credit funds, since some are believed to have suffered painful losses as a result of the recent market turmoil - not only in the subprime sector but corporate credit markets in general.
[In the series of woes of hedge funds, FT Alphaville notes the heightened appetite for news of certain funds’ July performances – for example, Tudor Investments which, as the WSJ reports Thursday, had an unusually bad July].
Indeed, many bankers assume there will be further hedge fund implosions during coming weeks, says Tett.
However, although these pressures make July’s NAV data particularly important, “it is often difficult to ascribe precise values to many complex financial instruments even in calm markets, because these markets are illiquid”, says Tett.
As a result, funds have often relied on models to value these instruments. “But there is also growing unease about the quality of some of these models, given that conditions in the subprime sector, for example, are turning out to be much worse than models have assumed”, she notes.
Worse still, the sharp swings in credit prices now also make it hard to value instruments according to market or broker quotes: “Illiquidity is making those month-end [valuation] marks look atrocious,” Suki Mann, analyst at SG Capital markets, told Tett.
Mann argued that in the mainstream credit default swaps sector, the bid-offer spread can now now be “as high as 20 basis points”(or between 5 and 20 per cent of the actual spread).
Some hedge fund managers on Wednesday suggested that the largest, best-capitalised funds will now pursue a very conservative approach to valuations in an effort to build credibility with investors.
However, with banks now raising margin calls, some weaker funds are scrambling for survival - raising the pressure for accounting tricks, they added.
Said one banker: “You are getting a distressed subprime asset which one person values at 20 cents in the dollar, and someone else values at 40 cents…There is a lot of scope for argument”.
Scope, perhaps, but maybe not that much time for argument. |
