Hedge Fund Valuation in Connection with Equitable Distribution

Hedge funds now comprise a large portion of the alternative investment industry, and in connection with equitable distribution statutes, the valuation of a hedge fund management company and General Partner are becoming more important. Determining the proper value to ascribe to these interests is complex, and as will be discussed below, matrimonial attorneys should be aware that the value of an individual's interest in a hedge fund is often greater than just the value of his or her capital account. Additionally, given the turbulent economy, and specifically the volatility in the financial markets over the last three-plus years, hedge fund valuation presents several challenges in the field of business valuation for the purposes of equitable distribution.

Valuing an individual's interest in a hedge fund management company and/or general partnership is different from valuing an interest in an operating company, a professional corporation, or even an investment management company. The main challenge for valuators is the fact that hedge fund managers earn income two ways: from base management fees (typically 1% to 2% of assets under management, or AUM) and incentive fees, which are based on the performance of the assets in the fund (typically around 10% to 20% of the appreciation, subject to certain hurdle rates and a high watermark).