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
The SEC's 'Fair Value' Standard for Mutual Fund Investment in Restricted Shares and Other Illiquid Assets
....Under the Investment Company Act of l940, the SEC requires mutual fund boards to determine and report the "fair value" of their investments in restricted shares and other illiquid equity claims. The SEC interprets fair value to mean value in current sale. Under the Investment Company Act, fair value reporting is a "certification" standard that presumes investors rely on the value representations of the fund board and its auditors.....
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=249317#PaperDownload
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=249317#PaperDownload
Your fund manager may not be clueing you
.........
If you are familiar with mutual fund rules, you probably never would have thought that a waiting game could happen. Mutual funds are required by law to examine every stock and bond they have in a fund, and report to the public exactly what each is worth at the end of each day. This process is called "marking to market," or reflecting the exact value of the investments that make up your mutual fund portfolio at a point in time.
The rule is supposed to give you clarity – to allow you to see what you own in a fund and if you have made or lost money on any single day, week or month. It bans wishful thinking.
But the process is a lot more complicated with subprime mortgage securities than with your typical Treasury bond or a stock. That’s because no one knows exactly what the mortgage securities – or collateralized mortgage obligation (CDOs) are worth. One reason: The Wall Street concoctions are relatively new, and they have never been tested during a time when so many lenders faked mortgage applications and tossed mortgages freely to people who clearly could not afford them. The values of the securities depend on how many people default on mortgage payments. So under the circumstances, investors aren’t sure if the depressed securities will improve a little once the media attention dies down, or weaken a lot as more financially-stressed homeowners give up on making payments. In other words, just what are these things actually worth?
Also, the mortgage related securities don’t trade on an exchange like a stock does. So when fund managers have CDOs in portfolios and try to "mark them to market," they guess what they are worth. They look at other investors that have been buying or selling similar securities lately. Each offers, or settles, on a different price. So there is no clarity. And sometimes there are few transactions to observe.
In a situation like today’s – with investors fretting about subprime mortgages – many investors presumably are sitting tight and not selling. So the ugly prices they might have had to accept if they sold today, don’t actually show up.
This is not illegal, of considered deceptive, if the fund has a solid rationale for the price that is used at the end of the day when the security is "marked to market," according to Robert A. Robertson, a Newport Beach securities lawyer and leader in the American Bar Association.
...........
http://newsblogs.chicagotribune.com/marksjarvis_on_money/2007/07/subprime-in-mut.html
If you are familiar with mutual fund rules, you probably never would have thought that a waiting game could happen. Mutual funds are required by law to examine every stock and bond they have in a fund, and report to the public exactly what each is worth at the end of each day. This process is called "marking to market," or reflecting the exact value of the investments that make up your mutual fund portfolio at a point in time.
The rule is supposed to give you clarity – to allow you to see what you own in a fund and if you have made or lost money on any single day, week or month. It bans wishful thinking.
But the process is a lot more complicated with subprime mortgage securities than with your typical Treasury bond or a stock. That’s because no one knows exactly what the mortgage securities – or collateralized mortgage obligation (CDOs) are worth. One reason: The Wall Street concoctions are relatively new, and they have never been tested during a time when so many lenders faked mortgage applications and tossed mortgages freely to people who clearly could not afford them. The values of the securities depend on how many people default on mortgage payments. So under the circumstances, investors aren’t sure if the depressed securities will improve a little once the media attention dies down, or weaken a lot as more financially-stressed homeowners give up on making payments. In other words, just what are these things actually worth?
Also, the mortgage related securities don’t trade on an exchange like a stock does. So when fund managers have CDOs in portfolios and try to "mark them to market," they guess what they are worth. They look at other investors that have been buying or selling similar securities lately. Each offers, or settles, on a different price. So there is no clarity. And sometimes there are few transactions to observe.
In a situation like today’s – with investors fretting about subprime mortgages – many investors presumably are sitting tight and not selling. So the ugly prices they might have had to accept if they sold today, don’t actually show up.
This is not illegal, of considered deceptive, if the fund has a solid rationale for the price that is used at the end of the day when the security is "marked to market," according to Robert A. Robertson, a Newport Beach securities lawyer and leader in the American Bar Association.
...........
http://newsblogs.chicagotribune.com/marksjarvis_on_money/2007/07/subprime-in-mut.html
tough-talking bond fund managers
The TCW Total Return Fund's portfolio allocates 16% of its assets to triple-A-rated mortgage pass-through securities, which are bonds backed by pools of mortgages, and 75% to triple-A-rated collateralized mortgage obligations, which are more complex mortgage-backed securities....
Anderson, who co-manages the BlackRock Bond Investors Fund(MDHQX), plants the blame for the subprime mortgage mess firmly at the feet of the bond rating agencies, saying, "they are a huge concern.....these ratings are artificial because they have been relying on recent historical prices in a rising market," the fund manager said.
Robert Rodriquez, chief executive officer of First Pacific Advisors, was even more blunt. "We haven't seen much of a problem in the subprime area [but only] because the pricing is a fraud...."
http://www.thestreet.com/_yahoo/funds/mutualfundmonday/10365816.html
Anderson, who co-manages the BlackRock Bond Investors Fund(MDHQX), plants the blame for the subprime mortgage mess firmly at the feet of the bond rating agencies, saying, "they are a huge concern.....these ratings are artificial because they have been relying on recent historical prices in a rising market," the fund manager said.
Robert Rodriquez, chief executive officer of First Pacific Advisors, was even more blunt. "We haven't seen much of a problem in the subprime area [but only] because the pricing is a fraud...."
http://www.thestreet.com/_yahoo/funds/mutualfundmonday/10365816.html
Valuation Practices In The Hedge Fund Industry
Some valuation best practices have been widely adopted by the hedge fund industry, and while not universal, have become "standard" industry practice. Others have yet to be widely adopted. For example, while 78 percent of survey respondents reported using a third party administrator or other third party to provide their official net asset valuation, only 47 percent reported that they engaged a third party to provide independent pricing validation. For investors, this means they need to carefully review valuation practices before investing—and continue to monitor those practices once an investment has been made. Hedge fund advisers that have not yet adopted some best practices need to evaluate if they should adopt these practices in order to continue to attract investors and satisfy regulators.
There is very little uniformity in the valuation of various complex or illiquid assets. The lack of uniform accepted pricing methodologies reinforces the need for independent pricing validation.
About the Survey
http://www.mondaq.com/article.asp?articleid=48142
There is very little uniformity in the valuation of various complex or illiquid assets. The lack of uniform accepted pricing methodologies reinforces the need for independent pricing validation.
About the Survey
http://www.mondaq.com/article.asp?articleid=48142
Subprime market exposure at Rydex
Rydex U.S. Government Money Market Fund
It is important to note that the Rydex U.S. Government Money Market Fund solely invests in U.S. government securities, government sponsored agencies and repurchase agreements that are fully collateralized by U.S. treasury securities. As a result, Rydex’s U.S. Government Money Market Fund has no subprime market exposure. Also, as a policy, the Rydex U.S. Government Money Market Fund does not own asset-backed commercial paper of any kind.
http://www.rydexfunds.com/campaigns/Supbrime_Market.html
It is important to note that the Rydex U.S. Government Money Market Fund solely invests in U.S. government securities, government sponsored agencies and repurchase agreements that are fully collateralized by U.S. treasury securities. As a result, Rydex’s U.S. Government Money Market Fund has no subprime market exposure. Also, as a policy, the Rydex U.S. Government Money Market Fund does not own asset-backed commercial paper of any kind.
http://www.rydexfunds.com/campaigns/Supbrime_Market.html
Friday, October 5, 2007
Subscribe to:
Posts (Atom)