At a minimum your policy should explain your source(s) and frequency of pricing. With assets that are more challenging to price, you need to explain how you price them. You should address how prices are corrected, when errors are discovered, and what might justify a price being overridden. If you invest globally, you should address currencies and how they're priced (sources, timing, frequency).
GIPS requires, as-of 1 January 2010, firms to revalue their portfolios in the event of large cash flows. Your policy should explain what "large" means and also what "revalue" means and how it's carried out.
There's a lot to think about, no doubt. Policies ensure consistency, completeness, and correctness. In the drafting of the policy you should engage the appropriate individuals, which arguably include someone from operations, technology, performance, portfolio management, and compliance. It also might help to pass your document by your verifier for their input. You may want to form a "valuation committee," too, to address issues that may arise from time to time.
Thoughts?
p.s., I decided to amend this slightly, so as to avoid confusion. GIPS, both explicitly and implicitly, requires firms to have "valuation" policies. For example, ¶ I.4.A.12 states "FIRMS MUST disclose that policies for valuing PORTFOLIOS, calculating performance, and preparing COMPLIANT PRESENTATIONS are available upon request.." I guess the real point of this post was to touch a little bit more on "valuation." We can simply state that we "value our portfolios at month-end, and revalue for large flows, where 'large' is any external flow greater than 10%." I am speaking beyond this, however, and am addressing pricing of assets, in conformance with the requirement to use "fair value." I think the topic is much broader than perhaps one might think. Hope this helps!
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I do not see there is any choice in the matter as all authorised firms are required under their regulatory membership to have documented valuation policies. GIPS recognises the preordination of regulation in this respect in that local regulatory requirements may force a particular pricing hierarchy or methodology that may vary or conflict with that suggested in the standards. While local regulation and supranational accounting standards set out the respective requirements, the Hedge Fund Matrix provides useful guidance as to the composition of the valuation policy document and how it fits into a firm's broader operational control and oversight activites.
ReplyDelete(Colin Morrison)
Colin, thanks for your comments. Regulators vary, of course, but again, of course, firms are obligated to adhere to their requirements. I am not aware, for example, whether the SEC REQUIRES a "valuation policy," but perhaps they do. GIPS only speaks in very limited terms as to what is REQUIRED in P&P, but a list would, I believe, be beneficial for the industry. Perhaps something for someone to work on in advance of GIPS 2015!?!?! (if there will be such a thing)
ReplyDeleteAlthough GIPS doesn't explicitly state that firms must have "written" policies, we do see a requirement for verifiers to "understand the policies, procedures, and methodologies used to value portfolios and compute investment performance." As my initial post suggests, firms should have policies independently of GIPS, and so this merely affirms that it's a necessity.
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