Hedge funds and Private Equity - PES

ules should be developed to ensure that claims relating to investment performance and risks
are honestly and clearly communicated to consumers. This means that promoters or intermediaries
should not be allowed to be selective about the time periods used in promotions.
Moreover, the use of independent benchmarks should be stipulated to prevent promoters
selecting favourable investment universes to compare products;
rules on the disclosure of total charges to retail investors should be agreed to allow for objective
and accurate comparison of charges – especially where fund of hedge funds are involved.
Illustrations and projections should be provided on a consistent basis to allow investors to
compare the offerings of different fund managers – that is, funds with a similar investment
strategy should be required to use the same projected investment growth rates net of actual
total expenses and charges;
the EC should ensure that the content and presentation of risk warnings in any marketing or
promotional material should be clear, fair and conform to minimum standards.
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Funds that are eligible for marketing to retail investors should conform to a number of safeguards
including:
the need for an independent depositary;
retail investors should have access to alternative investments only under certain conditions –
for example, as part of a ‘fund of hedge funds’ or within a portfolio of conventional assets;
even then restrictions should apply with regards to diversification, limits on exposure, and
liquidity criteria.
Transparency alone does not guarantee high standards of governance and accountability (other
measures such as rules on fair treatment of separation of duties and independent audits are
needed). But greater transparency allows for other stakeholders in the investment chain to understand
the risks involved and be more aware of the impact and consequences of investment
decisions made on their behalf.
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A number of concerns have been raised about the valuation of assets within alternative investment
funds (see elsewhere in the report). The plausibility of the investment returns (and therefore
the validity of performance related fees) claimed by investment managers may be questioned as
a result of incorrect valuations. In addition, inconsistent valuation methodologies undermine the
ability of investors to assess risk, and can lead to differential treatment of classes of investors. It
is all about avoiding market abuse and ensuring asset valuations as correct as possible.
In summary, these concerns relate to:
the valuation methodologies used by investment managers;
the need for clearly defined responsibilities when valuing assets to deal with potential conflicts
of interest within fund management organisations;
the availability of independent and reliable sources of market prices;
independent and regular reviews of valuations;
a number of process issues including: timing of closing prices, dealing with pricing errors,
verification procedures.
Part III – Lessons to be drawn for future regulation
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