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Directors on hedge fund boards may face increased legal risks when they sign off on annual reports this year because of problems in valuing complex, illiquid credit securities, an insurance broker warned.

MONACO (Thomson IM) - The market turmoil has made clear that the valuation of assets and operational risk are the biggest issues currently facing single manager hedge funds, according to Andrew Dillon - a managing director at insurance intermediary Baronsmead Partners.

What skills are important when heading into potentially illiquid markets? In an illiquid market trading is at best difficult and at worst impossible. Different hedging strategies and suitable pricing adjustments are needed to stay ahead.

The credit crisis that reared its head during the summer of 2007 has continued to adversely affect global capital markets throughout the first quarter of 2008. While the most high-profile casualties have been Wall Street CEOs, as well as a number of funds and special purpose vehicles, the current market conditions also pose enhanced risks to fund managers and directors.

For the Board of Directors of a hedge fund, the problems surrounding accurate pricing of hard-to-value instruments, and the personal liability of the directors, is of real concern. Investors expect to transact at prices which reflect the underlying “fair value” of the assets, some may try to seek recourse from the Board, should the numbers reflect otherwise.

Valuation of increasingly complex hedge fund assets is of concern both to investors, who want to
know how much their holdings are worth, and hedge fund managers who want to maintain investors’ confidence. Robert Kelly suggest some tips for avoiding mispricing.

Robert Kelly explains how to keep your investors - and regulators - on board.

Valuation of hedge fund assets has become indisputably one of the key business and regulatory issues in the industry. How to value illiquid instruments is occupying minds inside and outside the industry. On the inside, the Alternative Investment Management Association in March published its Guide to Sound Practices for Hedge Fund Valuation. This followed hot on the heels of the International Organisation of Securities Commissions releasing its Principles for the Valuation of Hedge Fund Portfolios. The issue was even on the agenda of a meeting in April of the G7 advanced industrial nations where representatives of leading hedge funds met deputy finance ministers.

The valuation of hedge fund assets has risen from nowhere to become a hot-button issue. How to value illiquid instruments is occupying minds inside and outside the industry. On the inside, the Alternative Investment Management Association in March published its Guide to Sound Practices for Hedge Fund Valuation. This followed the International Organisation of Securities Commissions releasing its Principles for the Valuation of Hedge Fund Portfolios.

In 2008 hedge fund directors, and their auditors, will need to start working on the year-end audit and this will crystallise the valuation of the fund’s portfolio. The directors are responsible for ensuring that the accounts give a true and fair view of the of the state of affairs of the fund and the directors will have to personally sign off the accounts.