Hedge funds pass valuation test: FSA

LONDON (Reuters) - Hedge funds are largely succeeding in obtaining accurate valuations for their investments, even in the case of illiquid or complex securities, the UK's financial watchdog said on Tuesday.

Following a study looking at the valuation practices of hedge fund managers, the FSA "is about to write to the International Organization of Securities Commissions (IOSCO) relaying what we have found to be good practice in this area", said Thomas Huertas, the FSA's director of wholesale firms at the Reuters Investment Banking Summit in London.

"We have found that third parties administrators can provide a level of protection, though there have been instances where the minimum standards have not been achieved."

The FSA in March obtained an undertaking from Jae Wook Oh, a former hedge fund investment manager at Regents Park Capital Management LLP (Regents Park) that he would avoid any controlled function in relation to regulated activities for three years.

"It appears that over a number of months in 2005 there was a discrepancy between the realizable value of certain investments and those valuations provided by Regents Park," the FSA said at the time.

While the large part of the industry was successful in valuing its investments, there were special difficulties in relation to some complex derivative products, Huertas said.

"For some complex illiquid instruments, finding a fair value is a difficult task, with a wide disparity between bid and ask and low levels of trading. In that case it's difficult to get an accurate price, so it's necessary to get an indicative quote from several parties."

Huertas's comments came after the FSA earlier this year began work on looking at the issue of valuation practices in the alternative investment industry.