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Valuation issues and operational risk in hedge funds




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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    References listed on IDEAS

    1. John Williamson, 2000. "The Role of the IMF: A Guide to the Reports," Policy Briefs PB00-5, Peterson Institute for International Economics.
    2. Raffer, Kunibert, 1998. "The tobin tax: Reviving a discussion," World Development, Elsevier, vol. 26(3), pages 529-538, March.
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    4. Nunnenkamp, Peter, 2002. "IWF und Weltbank: trotz aller Mängel weiterhin gebraucht?," Kiel Discussion Papers 388, Kiel Institute for the World Economy (IfW).
    5. Stephany Griffith-Jones & Stephen Spratt, 2003. "Basel II and Developing Countries: Diversification and Portfolio Effects," FMG Discussion Papers dp437, Financial Markets Group.
    6. Griffith-Jones, Stephany & Segoviano, Miguel Angel & Spratt, Stephen, 2003. "Basel II and developing countries: diversification and portfolio effects," LSE Research Online Documents on Economics 24824, London School of Economics and Political Science, LSE Library.
    7. Nunnenkamp, Peter, 2001. "Umbaupläne und Reparaturarbeiten an der internationalen Finanzarchitektur: eine Zwischenbilanz aus deutscher Perspektive," Kiel Working Papers 1078, Kiel Institute for the World Economy (IfW).
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    More about this item


    Hedge funds; failures; operational risk;

    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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