In the past few years, industry led initiatives supported by the regulators have led to a very much wider use of pricing policies in hedge funds.
We have supported this move and have prepared out own suggested Pricing Policy document, a template, which is attached herewith.
The purpose of the Pricing Policy document is to make it absolutely clear to all parties, including investors, the investment manager, the auditor and the administrator how the assets in a fund should be priced, however, because of the very broad range of assets that alternative investment and hedge funds may invest in from time to time, there are an equally broad range of pricing policies and this is not just related to the more complex assets. For example, exchange traded large cap US stock could be priced in a variety of ways, including, inter alia:
- The closing bid price on the exchange
- The closing offer price on the exchange
- The closing mid-price on the exchange
- The last traded price on the exchange
Furthermore, there might be a choice of exchanges upon which a particular asset is traded and therefore that needs to be specified.
Current accounting principles, in many jurisdictions, require that long positions should be valued at the bid price and short positions valued at the offer price, but this requirement may only apply to the financial statements and, therefore, the Net Asset Value, as published for the last valuation of each year, may be published as an "Audit NAV" and a "Trading NAV".
Thus, it can be seen that, if there is not a clear pricing policy, there is, even with a simple long short equity fund, room for misunderstanding, error and dispute. The attached Pricing Policy document is supposed to clarify the situation, but please recognise that it is both a fluid document and subject to agreement between each fund's investment manager and the administrator and approval by the Board.
You will see that this document is divided into several parts:
Part 1 is the agreement between parties;
Appendix 1 discusses pricing policies that may be used for different assets;
Appendix 2 outlines the specific policy that will apply to the assets of the fund; and
Appendix 3 includes price tolerance limits in the event that there are unavoidable differences in prices obtained from different sources.