Trends and Practices at Hedge Fund Administrators: Pricing Complex & Illiquid Instruments

13 November 2008

OTC Valuations Ltd (OTC Val) today released a white-paper titled "Independent Pricing For Complex Derivatives and Illiquid, Hard-to-Value, Securities: Trends and Current Practices at Hedge Fund Administrators". Given today's market conditions and dominant trends in the hedge fund industry, this paper offers a view of the trends and challenges at hedge fund administrators.

In today's fast paced and competitive environment, a number of trends and market forces are creating inherent requirements for the hedge fund administrator community to modify current business and operational processes and to adopt new practices designed to provide greater insight and transparency into the value of derivatives.

With hedge funds seeking institutional assets, investor and regulatory pressure for hedge funds to adopt industry best practices, such as third party independent derivative valuations and valuation transparency, has renewed interest with hedge funds to place a greater focus on implementing the appropriate valuation controls. In doing so, this has led to fund administrators that perform back office support functions for hedge funds to revamp their operational processes.

As hedge funds continue to invest in complex derivatives and structured products in search of higher returns, a fund administrator must overcome the challenges of valuing complex and structured products and ensure it has the technical expertise and knowledge required to value complex and structured products.

While many administrators have taken a proactive measure to improve their operational infrastructure, they are faced with a subset of challenges. The white-paper provides insights into the current trends and challenges administrators face in implementing a solution and finding a balance between the build, buy, partner decision and implementing the technology and the requisite expertise required to manage the valuation and market data processes.

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