Valuation Policy
A fund's documented methodology for pricing every asset it holds — which sources take priority, at what cadence, and who can override a price.
Definition
A valuation policy is a fund's documented methodology for pricing every asset it holds — which data source takes priority for which asset, how illiquid or restricted positions get marked, at what cadence prices are struck, and who has authority to override a price and under what circumstances. It's typically formalized in a written document referenced by the fund's limited partnership agreement or private placement memorandum, and reviewed by the fund's auditor and, where one exists, its administrator.
A well-specified policy reads less like a single rule and more like a waterfall: a primary, preferred pricing source for liquid assets, a defined fallback if that source is unavailable, and separate treatment entirely for assets that don't have a reliable market price at all — which is where the fair-value hierarchy and, in extreme cases, side pockets come in.
Why it matters
A documented policy is what stands between NAV and manager discretion. Without one, 'the manager decided this was the right price' is the entire audit trail behind a mark — exactly the kind of judgment call institutional LPs and auditors want removed from case-by-case discretion and fixed in writing ahead of time.
Consistency matters as much as the specific choices in the policy: switching data sources mid-period based on which one happens to give a more favorable mark undermines the whole point of having a policy, even if each individual source used would have been defensible on its own.
What a typical pricing waterfall covers
For liquid, actively-traded assets, a policy typically specifies a primary source — often a specific exchange or a volume-weighted reference across several — chosen in advance rather than picked at valuation time, so a single thinly-traded or manipulated venue can't set the fund's official price.
For assets without a reliable live market — vesting tokens, pre-launch allocations, illiquid OTC or DeFi positions — the policy specifies a fallback methodology: often cost, a documented model, or the last observed transaction price, sometimes paired with side-pocket treatment. The policy should also state explicitly what happens if the primary source is simply down or halted at the valuation date, rather than leaving that as an improvised decision.
Any manager override of a policy-derived price is typically logged and requires documented justification, so a departure from the stated methodology is visible after the fact rather than indistinguishable from a routine application of the policy.
Common mistakes
Leaving pricing to undocumented manager discretion — 'the manager decides' without objective criteria defeats the purpose of having a policy at all.
Failing to address what happens when a primary pricing venue is down, delisted, or halted at the exact moment a valuation is struck.
Not specifying how DeFi positions, LP tokens, or staked assets get valued at all, leaving a growing share of a modern crypto fund's book outside the policy's actual coverage.
Switching data sources between periods based on which gives a more favorable mark for that period's fees, rather than applying the same methodology consistently.
In practice
Crypto assets can trade on dozens of venues simultaneously at meaningfully different depths, and a low-liquidity token is more exposed to a single manipulated print setting an unrepresentative price than a large-cap, deeply-traded asset. A crypto fund's valuation policy commonly pins a specific, pre-agreed pricing source per asset (or per asset class) and explicitly prohibits switching sources opportunistically, to guard against a thin or manipulated venue distorting NAV.
A fund's valuation policy is also the reference point auditors and administrators use to check whether a given period's marks were actually applied consistently — which is why documenting it in writing, before any specific valuation dispute arises, matters more than anticipating every edge case perfectly up front.
Questions, answered
What is a fund valuation policy?
A valuation policy is a fund's documented methodology for pricing every asset it holds — which data sources take priority, how illiquid assets are marked, valuation cadence, and who can override a price and under what conditions.
Why does a fund need a written valuation policy?
Without one, pricing decisions rest on undocumented manager discretion, which auditors and institutional LPs specifically want removed and replaced with a fixed, pre-agreed methodology they can test NAV against.
How does a valuation policy handle illiquid or hard-to-price assets?
It typically specifies a fallback methodology — cost, a documented model, or last transaction price — for assets without a reliable live market, sometimes combined with side-pocket treatment to isolate the asset from the fund's main NAV entirely.
Can a manager change the valuation policy whenever they want?
Not without documentation and justification. A defensible policy requires overrides to be logged and explained, and switching methodology opportunistically between periods defeats the purpose of having a policy at all.
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