B

Back pricing is a practice in which investors make commitment to investing in a hedge fund at a price to be determined by the fund later. It arises from the trading mechanisms in the hedge fund market. For buy orders, a hedge fund may adopt a subscription period (e.g., 1 month, which means the fund can be subscribed to once every month). Th e buy orders received within the subscription period will be honored at the end of the subscription period at a price of the net asset value of the fund, which is the value of total assets minus the value of total liabilities. For sell orders, a hedge fund may adopt a lockup period clause, which restricts new investors from redemption until the lockup period is over, or a redemption period clause, which stipulates that fund shares or units can only be redeemed at a certain frequency (e.g., monthly). For hedge funds without shares restriction, they are generally priced no more frequently than at the closing of each trading day. To compute the net asset value, which is the basis for ascertaining the prices applicable to investor subscriptions and redemptions, various techniques are used for diff erent types

of securities. For example, standard markto-market techniques are suffi cient for equities. Commoditized pricing, including investment grade corporate, municipal, and government bond prices, is generally calculated using a computer model with little or no manual intervention. A hedge fund may hold illiquid assets and complex securities so that the prices of their assets are not immediately available due to lack of transactions. To value those securities, the fund needs to source the price information from independent brokers and market makers, or the counterparties to the specifi c OTC transactions. Mortgage-related products are oft en priced using models with analytical data and dealer quotes as inputs.