Measurement, Governance and Long-term Investing, World Economic Forum USA Inc., March 2012
“This report focuses on the first of those obstacles measurement and governance. It discusses in depth issues related to the estimated US$ 2.4 trillion invested in illiquid assets, which can be subject to substantial distortions and misallocations resulting from inadequate measurement. Traditional metrics for valuing those assets all have significant drawbacks, and more worryingly tend to misstate key risks such as market risk, illiquidity risk and liability risk. The research finds that it is useful to use a limited number of consistent measurements matching a long-term investing horizon. Such metrics should be directionally correct (roughly right rather than precisely wrong) and used to critically evaluate positive or negative investment outliers on a periodic basis. It is found that purported lower volatility and correlations in illiquid assets often result from stale prices rather than fundamentals. Yet a more aggressive mark-to-market approach needs to be tempered to adjust to pro-cyclical pressures.”
Sorry, comments are closed for this post.