Hedge fund transparency: quantifying valuation bias for illiquid assets: Difference between revisions

The 2002 paper "Hedge Fund Transparency: Quantifying Valuation Bias for Illiquid Assets" by Eric Weinstein and Adil Abdulali introduces a framework called "phantom pricing" to address the challenges in valuing illiquid, or "translucent," assets. These assets lack consensus pricing due to infrequent or private trading, which complicates the use of standard risk measures like the Sharpe ratio. The authors propose treating pricing uncertainty as an additional risk that investors should be compensated for. They present a two-step approach that uses probability distributions derived from indicative price samples to estimate a "phantom price," reflecting a risk-adjusted valuation based on investor preferences.