Tips for Investment Managers Navigating the Hairiest Month-End (and Quarter-End) Ever

Anne Beaumont
March 26, 2020

The coronavirus crisis presents a “perfect storm” for hedge funds in terms of timing, ramping up as it has just before a quarter-end, when NAVs are due and subscriptions and redemptions are processed, not to mention in the middle of audit season.  As March 2020 month-end approaches, investment managers face the challenge of determining their funds’ NAVs in the most daunting market and operational conditions imaginable.  The following are some practical suggestions and issues to consider:

  • Review fund documents and make a plan. Locate and review carefully each fund’s offering documents, valuation policies and any other potentially applicable documents.  Managers will in many instances face using secondary or fallback methods of valuation, so it is critical to know what is permissible.  For some valuation methodologies, it may be necessary to involve independent directors or other third parties so build in time for that additional work.
  • Classify portfolio positions as if this were the first NAV ever. Are those Level 1 assets still Level 1 assets or should they be treated differently this month?  What is the most reliable source of valuation information available – is it the same source you used last month? 
  • Look at the valuation information you receive with a skeptical eye. Are prices from some sources stale or based on thin trading?  Should you get additional prices and if so, from where?  Should you consider using a third-party pricing service?  For any methodologies you haven’t used before, first determine whether it’s permissible under the applicable documents and valuation policies.
  • Line up outside help. If you expect to have to use new pricing sources or methodologies or an outside pricing vendor for the first time, identify and onboard them immediately, even if you’re not sure you will ultimately use them.  Consider whether it would be worthwhile to obtain an outside legal or accounting opinion on certain valuations, as many fund documents provide exculpation or limit liability where legal or accounting advice is obtained in good faith.  For this purpose, it makes sense to use a lawyer other than the fund’s day-to-day fund counsel:  if there is a dispute or investigation about the valuation, the lawyer giving the opinion may become a fact witness for the fund, and therefore may be unable to continue advising the fund on an ongoing basis under the applicable ethical rules.  Similarly, a fund’s external auditor will not (and should not be asked to) provide formal accounting advice on individual valuations, both because the auditor expresses its opinion on the financial statements “as a whole” only, and not on individual valuations or line items, and because conduct by the auditor that constitutes advocating for the client could endanger their independence and potentially require their resignation.  For an accounting opinion on a specific valuation, consider whether to consult a separate accounting firm.
  • Document each decision in real time. It will be impossible to remember each decision that is made, what it was based on and why it was made.  Write down everything, including each decision point and the rationale at the time of the decision.  Save every scrap of backup documentation, including valuation information you decide not to use (documenting, of course, why not).  Valuation committee minutes also should be prepared with the utmost care, promptly after the meeting and before the NAV is published.
  • Prepare for scrutiny. Conduct your month-end NAV work with the expectation that it will be scrutinized by investors (both those who redeem and those who remain or invest in the fund), due diligence firms, regulators and others.  Also keep in mind that in times such as these, “business as usual” becomes a red flag, so take care to avoid falling back to doing what has always been done – question everything. 

This is not intended to provide legal advice for specific situations, and no legal or business decision should be based on its content. If you would like us to advise you on your specific situation, please feel free to contact us.