Fair Value Adjusted Indexes: Constructing Better Investor Benchmarks
- Topics:
- Commercial Lending
- Source:
- Journal of Indexes
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Overview: A rigorous, consistently applied, fair value model is a highly effective tool in reducing arbitrage profits and market timing, and simultaneously helps a fund complex comply with SEC guidance regarding fund pricing. Yet, despite the clear benefit to long-term shareholders of using fair value pricing, implementation faces several challenges. In particular, fair value pricing potentially exaggerates the true tracking error of a fund. Further, in the absence of a common or “market standard” model, fund groups differ in their choice fair value models, with many yet to adopt a systematic and consistent approach to fair value pricing. These factors can distort one-day returns between funds, complicating the task of comparing investment performance. One solution, advocated here, is for public benchmark providers to produce fair-value adjusted indexes. This is straightforward to implement, would speed the adoption of fair value pricing in the industry and coalesce agreement on common standards for fair value adjustments.
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Format: HTML | Date: Apr 2003 | Pages: 6
