Define the process. Test the process. Refine the process. Document the process. Communicate the process. Follow the process with rigor and collect data along the way to ensure that the process continues to be both accurate and stable. This is the way it's done.
http://seekingalpha.com/article/36693-hedge-fund-asset-pricing-it-s-all-about-the-process
Monday, October 29, 2007
legalese....
As we like to remind our clients periodically, the auditor of an insured depository institution cannot be indemnified by their clients. Worse, ifthe bank suffers a significant loss and ends up in a regulatory resolution, the audit firm can face not just a civil lawsuit by investors -- but an enforcement action by the Fed, OCC and/or FDIC. In the event, the audit firm gets to explain why they relied upon "mark-to-dealer" pricing to value CDOs on the books of their bank clients. The moral of the story: Next time you call your friendly dealer for the monthly market-to-market on your CDOs, instead of merely asking for an"indicative price," ask for a live bid in $5 or $10 million -- and then hit the bid.
http://seekingalpha.com/article/39867-collateralized-debt-obligations-mark-to-dealer
http://seekingalpha.com/article/39867-collateralized-debt-obligations-mark-to-dealer
Interactive Data Corporation Q3 2007 Earnings Call Transcript
Question from Randy Hugen - Piper Jaffray
Al right, great. And then also, could you just walk us through the business impact that you've seen from the sub-prime fallout? Maybe talk a little bit about the shorter-term and longer-term implications for your business?
Stuart Clark responds:
Yes, I mean its, there is not a lot I can say on that. And clearly its been a turbulent market, in the credit market over the past months. The underlying level of our business it produced operational challenges. I hope that, as we see the credit coming back to more stable form. Its easier to do some things that it was over this period. But if you look at the underlying business, the need has not gone away for clients to be able to value securities, subprime actually and it formed a small component of the coverage within our product and also related services makeup only a very small part of our revenues.
So yes, with that in mind and what I can also say is it hasn't had any impact. I hadn't seen, we haven't seen any impact in the overall propensity of customers to be investing in new services and projects. So in a sense there has been -- you might see there's been a level of inconsistency there. There is everybody is focused on it, but actually things in our world, would be moving along much on a business as usual basis and on an as expected basis. So that's about all what I could really say about it.
http://seekingalpha.com/article/51505-interactive-data-corporation-q3-2007-earnings-call-transcript?source=feed
Al right, great. And then also, could you just walk us through the business impact that you've seen from the sub-prime fallout? Maybe talk a little bit about the shorter-term and longer-term implications for your business?
Stuart Clark responds:
Yes, I mean its, there is not a lot I can say on that. And clearly its been a turbulent market, in the credit market over the past months. The underlying level of our business it produced operational challenges. I hope that, as we see the credit coming back to more stable form. Its easier to do some things that it was over this period. But if you look at the underlying business, the need has not gone away for clients to be able to value securities, subprime actually and it formed a small component of the coverage within our product and also related services makeup only a very small part of our revenues.
So yes, with that in mind and what I can also say is it hasn't had any impact. I hadn't seen, we haven't seen any impact in the overall propensity of customers to be investing in new services and projects. So in a sense there has been -- you might see there's been a level of inconsistency there. There is everybody is focused on it, but actually things in our world, would be moving along much on a business as usual basis and on an as expected basis. So that's about all what I could really say about it.
http://seekingalpha.com/article/51505-interactive-data-corporation-q3-2007-earnings-call-transcript?source=feed
statistics
http://www.hedgeweek.com/articles/detail.jsp?content_id=9767&livehome=true
- 32% of respondents report that the pricing of illiquid instrumentsrepresents the most significant challenge with regard to portfoliovaluation;
- Hard-to-value instruments represent only 14% of the aggregate value ofthe funds managed by respondents;
- 73% of hedge fund respondents have an independent administrator toprovide NAV;
- 65% of all respondents have a value error tolerance that their firmuses before re-calculating NAV;
- 93% of administrators are fully independent from the manager;? There is a general desire to enhance valuation practices andprocedures.
- 32% of respondents report that the pricing of illiquid instrumentsrepresents the most significant challenge with regard to portfoliovaluation;
- Hard-to-value instruments represent only 14% of the aggregate value ofthe funds managed by respondents;
- 73% of hedge fund respondents have an independent administrator toprovide NAV;
- 65% of all respondents have a value error tolerance that their firmuses before re-calculating NAV;
- 93% of administrators are fully independent from the manager;? There is a general desire to enhance valuation practices andprocedures.
Wednesday, October 24, 2007
buy-side pricing job reqs....
-----------------
The role has responsibility for pricing the positions, for daily, weekly and fortnightly valuations. This involves technical expertise, and significant skills at negotiating with counterparties and front office staff. The pricing role is fundamental to their valuations, and the ideal candidate will have a robust, problem solving approach to the role, with experience of maintaining and improving processes.For up to 40% of the time, the new hire will be involved in developing and improving the current systems and processes in relation to the pricing system and controls throughout the business. This is likely to involve both ongoing improvements and project management.The desired candidate will have strong Credit Derivatives experience either in a Valuations/ pricing or a Product Control position and a professional qualification in ACA or CFA capacity with strong degree academics.
------------------
The role has responsibility for pricing the positions, for daily, weekly and fortnightly valuations. This involves technical expertise, and significant skills at negotiating with counterparties and front office staff. The pricing role is fundamental to their valuations, and the ideal candidate will have a robust, problem solving approach to the role, with experience of maintaining and improving processes.For up to 40% of the time, the new hire will be involved in developing and improving the current systems and processes in relation to the pricing system and controls throughout the business. This is likely to involve both ongoing improvements and project management.The desired candidate will have strong Credit Derivatives experience either in a Valuations/ pricing or a Product Control position and a professional qualification in ACA or CFA capacity with strong degree academics.
------------------
the process....
http://seekingalpha.com/article/36693-hedge-fund-asset-pricing-it-s-all-about-the-process
http://search.ft.com/nonFtArticle?id=070528000448
Vendors' techniques vary depending on the type of security being priced. Commoditised pricing, including investment grade corporate, municipal and government bond prices, is generally calculated using a computer model with little or no manual intervention.
Complex and illiquid issues are typically hand-priced, involving an evaluator calling the desk of a broker-dealer that makes a market in the security (ideally the primary dealer). Mortgage-related products are often priced using models with analytical data and dealer quotes as inputs. Vendors will often incorporate actual trade data into the models and adjust the model prices in line with any visible trades in the market. This process is clearly far from straightforward.
While there are no precise answers to the questions of complex derivative pricing, there can be a precise, clearly communicated process that is followed for valuing such instruments. And this is what will set hedge fund managers free. It is hard to get angry - much less get litigious - if someone tells you the process they are going to follow for handling a complicated problem that is carefully adhered to and logical on its face. No funny business. No single-data point valuation on which NAV and, therefore, compensation is based. Engage several dealers, maybe even rotate among a larger number to ensure fairness and independence, toss out the high and low, document all responses, repeat.
If positions are held for trading, meaning that short-term assets are being funded with short-term liabilities, then you've got to use either market prices or prices privately received from, say, five dealers, who are quoting based upon taking the bid (or at least the mid) side of the trade. And these are the prices that should be used for both NAV and performance fee calculations for funds, and carrying values for banks and other kinds of asset managers.
Let me repeat: If the asset is a trading asset funded with short-term trading liabilities, then you need true marks. No marking to model. Period. Because as we all know, models don't begin to reflect the realities of financial distress, and are inevitably skewed in favor of the manager, if not intentionally then at least subliminally because managers, by definition, tend to love their positions.
Conversely, if positions are held for investment, it must be demonstrated that such investments are funded with liabilities of like or longer duration. This way, an investor can take comfort in knowing that while the values used might not be market-based, the manager can ride out adverse market conditions and not be forced to liquidate at the worst time. However, investment assets should not attract performance compensation until they are sold, and Management must provide clear documentation as to the process used to value these assets for NAV calculation purposes.
http://search.ft.com/nonFtArticle?id=070528000448
Vendors' techniques vary depending on the type of security being priced. Commoditised pricing, including investment grade corporate, municipal and government bond prices, is generally calculated using a computer model with little or no manual intervention.
Complex and illiquid issues are typically hand-priced, involving an evaluator calling the desk of a broker-dealer that makes a market in the security (ideally the primary dealer). Mortgage-related products are often priced using models with analytical data and dealer quotes as inputs. Vendors will often incorporate actual trade data into the models and adjust the model prices in line with any visible trades in the market. This process is clearly far from straightforward.
While there are no precise answers to the questions of complex derivative pricing, there can be a precise, clearly communicated process that is followed for valuing such instruments. And this is what will set hedge fund managers free. It is hard to get angry - much less get litigious - if someone tells you the process they are going to follow for handling a complicated problem that is carefully adhered to and logical on its face. No funny business. No single-data point valuation on which NAV and, therefore, compensation is based. Engage several dealers, maybe even rotate among a larger number to ensure fairness and independence, toss out the high and low, document all responses, repeat.
If positions are held for trading, meaning that short-term assets are being funded with short-term liabilities, then you've got to use either market prices or prices privately received from, say, five dealers, who are quoting based upon taking the bid (or at least the mid) side of the trade. And these are the prices that should be used for both NAV and performance fee calculations for funds, and carrying values for banks and other kinds of asset managers.
Let me repeat: If the asset is a trading asset funded with short-term trading liabilities, then you need true marks. No marking to model. Period. Because as we all know, models don't begin to reflect the realities of financial distress, and are inevitably skewed in favor of the manager, if not intentionally then at least subliminally because managers, by definition, tend to love their positions.
Conversely, if positions are held for investment, it must be demonstrated that such investments are funded with liabilities of like or longer duration. This way, an investor can take comfort in knowing that while the values used might not be market-based, the manager can ride out adverse market conditions and not be forced to liquidate at the worst time. However, investment assets should not attract performance compensation until they are sold, and Management must provide clear documentation as to the process used to value these assets for NAV calculation purposes.
Sunday, October 7, 2007
Illiquid assets that are extremely hard to value
...........
Christopher Addy, president of Castle Hall Alternatives, which provides operational due diligence services for hedge fund investors said, “Valuation of these instruments can be extremely challenging. There is no “standard” pricing process and investors need to understand each fund’s procedures to value securities for the monthly net asset value (NAV) calculation. Ultimately, though, you can’t lose sight of the simple maxim that any security is only worth what someone will pay for it, at the time you want to sell it. For funds holding exotic CDO’s and other hard to value instruments, the only true test of value is the price in the market when the fund needs to sell.”..........
http://www.duediligencedigest.com/ialt/ddd/issue.aspx?id=126
Christopher Addy, president of Castle Hall Alternatives, which provides operational due diligence services for hedge fund investors said, “Valuation of these instruments can be extremely challenging. There is no “standard” pricing process and investors need to understand each fund’s procedures to value securities for the monthly net asset value (NAV) calculation. Ultimately, though, you can’t lose sight of the simple maxim that any security is only worth what someone will pay for it, at the time you want to sell it. For funds holding exotic CDO’s and other hard to value instruments, the only true test of value is the price in the market when the fund needs to sell.”..........
http://www.duediligencedigest.com/ialt/ddd/issue.aspx?id=126
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