Pollster and word guru Frank Luntz is known for his admonition, “it’s not what you say; it’s what people hear.” This rang true for me this week.

I did a talk on Tuesday at the New York Society of Security Analysts (NYSSA) titled “Performance Measurement & Alternative Products: What’s different?” As you might suspect, I addressed hedge funds, private equity, and real estate. I pointed out that for illiquid assets (e.g., private equity and real estate, though this can apply to certain hedge fund assets, too), valuations can be quite difficult, which calls into question the accuracy of the returns that depend on them.

One young woman mentioned something to the effect that private equity managers aren’t “all cowboys” when it comes to pricing; that established rules are followed for pricing. I agreed, and cited the three-level hierarchy that the GIPS(R) (Global Investment Performance Standards) standards have for such pricing. But this doesn’t mean that the valuations are solid.

Case in point (okay, a slight diversion, but hopefully you’ll see the connection): in yesterday’s WSJ, Joesph B. White and Nick Timiraos mentioned how Detroit is witnessing a jump in housing prices (“Housing Revs Up in Detroit.”)  The very last paragraph referenced a realtor who cited a house that had just gone under contract for $80,000, which was appraised at $30,000! In my talk I mentioned how (a) prices are often subjective, (b) appraisers can use different methods (thus could come up with different valuations), and (c) valuations are often done without the benefit of transactions. What better example? An asset undervalued by more than 50%!

I never intended (thus my Luntz quote) for anyone to take away that I was suggesting that pricing of private equity and real estate assets is anything but formal, standardized, and with the greatest care. But, we all know how pricing can be suspect. I’ll try harder not to offend or mislead.