GLOBAL - Moves by the major ratings agencies to develop credit and risk ratings on hedge funds have been welcomed by the hedge fund industry.
Emma Mugridge, director at the Alterntive Investment Managment Association (AIMA) said she would welcome “any developments that will demonstrate the stability and risk management strengths of the hedge fund industry”.
Mugridge described the move as “a natural progression for the hedge fund industry, which has become increasingly mainstream”.
Philippe Bonnefoy, partner and chairman of the asset allocation committee of Cedar Partners (Europe)and director of the Cedar Fund, a fund of hedge funds, agreed, claiming ratings would help hedge funds attract business from institutional investors, who “take comfort” from seeing an investment vehicle evaluated and rated.
When asked whether the introduction of ratings would affect hedge funds’ potential to produce high returns, Bonnefoy said returns had already been affected by the entrance of significant numbers of institutional investors into the market five or six years ago.
Institutional investors, while attracted by the returns, preferred to chose managers with a more “robust” infrastructure and a more protectionist approach to investment. This was in contrast to traditional hedge fund investors, HNWIs, who were more interested in the potential for astronomical returns than the volatility of the markets and the risks involved.
As a natural consequence, Bonnefoy said hedge fund managers had become increasingly more conservative, and the move towards rating only reflected this change.
Standard & Poors has been rating funds of hedge funds for a couple of years now, however this is the first move to rate hedge funds themselves.
The agency’s evaluation strategy is expected to be much more “process-based” than typical rating, looking at the team and their approach to investment, for example due diligence, more than the actual investments themselves, thus allowing hedge funds to maintain their relatively closed approach.
The move to rate hedge funds should also be good news for the SEC, who recently lost its high-profile request in the US Court of Appeals that non-US hedge funds should have to register with the commmission, in an attempt to create more transparency in the industry.
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