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Hedge Funds Rated |
rffrydr
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 Posted: Sat Dec 08, 2007 9:56 am Post subject: Hedge Funds Rated |
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| Quote: | Hedge fund ratings
Published: December 3 2007 08:57 | Last updated: December 3 2007 08:57
Hedge funds, which once shrank from scrutiny, are sidling into the spotlight. Public hedge fund ratings, offered by the credit rating agencies, are beginning to catch on. Moody’s now gives “operational quality” ratings based on all manner of funding, liquidity and governance criteria. Standard & Poor’s and Fitch carry out similar studies, wrapping them in overall assessments of counterparty credit quality.
From an investor’s point of view, it is theoretically appealing to see some kind of risk-control standard. Everyone’s big fear is another Amaranth – a fund brought down by a rogue trader. But there are several strikes against the ratings as they stand. First, a high selection bias – 13 of 14 funds rated so far by Moody’s are large, long-established outfits that have gained the top “OQ1” ranking.
For investors, it is hard to establish a framework for excellence if all you are seeing is excellence. Second, the agencies’ record in judging anything outside plain bonds is patchy: there are big questions over their ratings in structured finance, for example.
Third, unlike public credit ratings, which are constantly sensitive to industry and company-specific headwinds, hedge fund ratings can be static, and backward-looking. Further, the agencies may run up against some resistance from consultants and funds-of-funds, which sell themselves on their own ability to spot a well-run outfit among the 10,000 or so funds around the world.
A few years down the track, if the universe of rated funds has expanded, ratings may provide a handy snapshot, especially for smaller institutions that lack the means to carry out their own due diligence. It certainly makes sense for the agencies to try to diversify their customer bases, given the dwindling pool of structured vehicles. But for now, an OQ1 is likely to be no more than another line in the marketing blurb. |
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rffrydr
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