The UK’s Financial Services Authority says that it supports the paper released yesterday by IOSCO on the principles that should be used by hedge funds in valuing their investment portfolios.

“Hedge funds are playing an increasingly important role in the international capital markets and we are pleased to support IOSCO in promulgating valuation principles which are applicable across all national boundaries. The paper addresses the issues of how effective controls may be placed around the valuation process to mitigate conflicts of interest, increase independence in sourcing and review of the resulting valuations,” said Dan Waters, FSA Asset Management Sector Leader and chair of the IOSCO working group which drafted the valuation paper.

“Developing the principles alongside practitioners with extensive involvement in the hedge fund industry proved to be a very productive process for IOSCO. We very much appreciated the generous time and commitment given by industry experts. Their insight into effective valuation processes and open dialogue with regulators was invaluable,” he added.

The FSA says it recognizes that hedge fund management techniques provide an important source of investment style diversification for institutional and sophisticated investors. And, it notes, some hedge fund strategies involve exposure to illiquid and complex financial instruments which can present valuation challenges, especially when used in conjunction with leverage.

In an earlier discussion paper, the FSA noted the scope for encouraging improvements in hedge fund valuations by cooperation in an international context.