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Valuation issues and operational risk in hedge funds

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Abstract

In our recent study on the root causes of hedge fund failures, we identified a number of operational risk factors that together seem to account for approximately half of catastrophic cases. Issues related to valuation - the determination of fair-market value for all of the positions that make up a fund – underlie many of these operational risk factors. Recently, valuation problems have also been much in the news. These headlines suggest that the industry is not yet taking the steps needed to address problems in the valuation process. In fact, we believe that issues related to valuation of portfolios will likely become the next major 'black eye' for the hedge fund industry. Unless certain practices discussed in this paper become more widespread, we believe that hedge funds face a potential crisis of confidence with institutional and high net worth investors. Therefore, we are using this paper to consider the issues related to the valuation of hedge fund portfolios more closely, in particular as they pertain to the issue of managing operational risks associated with hedge fund investments.

Suggested Citation

  • Kundro, Christopher & Feffer, Stuart, 2004. "Valuation issues and operational risk in hedge funds," Journal of Financial Transformation, Capco Institute, vol. 10, pages 41-47.
    • Handle: RePEc:ris:jofitr:1343
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    More about this item

    Keywords

    Hedge funds; failures; operational risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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