Pricing and valuation is an inherently complex process. Funds are pricing hundreds, sometimes thousands, of instruments in dozens of portfolios, using inputs from multiple market data vendors and broker quotes. These are typically categorized as listed, over-the-counter (OTC) and private securities. Since most funds have a relatively small team devoted to the task of calculating both daily and monthly prices, they have developed over time highly customized spreadsheets for each category of securities to make the process easier.
Due the fact that hedge funds deal in both liquid or illiquid assets, a number of added nuances and complexities tend to have an impact on the pricing process. Prices of liquid instruments are readily available and less disputable, which is why those that deal in liquid instruments, such as long-short, global macro and activist funds, have a more straightforward pricing process. For funds that deal in illiquid assets, such as swaps, ABS, MBS, bank debt, loans and private deals, the pricing process is a much more involved exercise for each of the following reasons: Read More
Given its complex nature, the pricing of portfolio positions often involves a great deal of time-consuming work, beginning with data collection to rules application and pricing tests. Even in normal market environments, this process is no easy task. As we have now entered an entirely new dynamic, pricing teams are under an immense amount of pressure to accurately value their securities. Many of the funds have seen significant increase in trading volume and this coupled with underlying volatility in the market have created never-seen pricing issues for the valuation teams.