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Hedge funds invest in privately traded securities whose true value is obscured by many conflicting indicative prices estimated by a small collection of broker dealers.


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Capital Market Risk Advisors (CMRA) and AdKap L.L.C.




Come up with a system that allows a full extension of standard financial tools to analyze these ‘translucent’ securities, while at the same time incorporating the lack of a reliable price.


Customized Toolkit

For this problem we chose an approach using the risk calculus of von Neumann - Morgenstern together with choices of functional forms from probability theory (modified Gamma and Beta Distributions) and Arrow-Pratt risk aversion.



Treat the blizzard of indicative prices as a source of additional risk so that risk averse investors should expect additional compensation as the prices spread out. Then use the indicative prices as if they were a random sample from a probability distribution governing the true price. Use the risk aversion of the investor to discern a certainty equivalent in the form of a definite spot price of a hypothetical liquid security. Because the spot price exists while the equivalent liquid security does not exist, we called certainty equivalent  the phantom price.



And Talks

  1. Debate on my proposal for an Economic Manhattan Project.


  1. Hedge Fund Transparency: Quantifying Valuation Bias for Illiquid Assets in RISK, June 2002, pg. S25.


  1. Phantom Prices & Liquidity: the nuisance of translucence, Chapter Eight of A Guide to Fund of Hedge Funds Management and Investment, L. Rahl Editor, AIMA, 2002


  1. Spot Prices: Fact or Fiction? Risk or Reward? MIT ‘View of the Markets’ lecture, JP Morgan, New York.




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