Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 41)

In Focus Grading Hedge Funds Ratings, Interrupted mong the ifs and shoulds and might-have-beens haunting investors who have lost money in hedge funds lately is the one about ratings. What if there had been a comprehensive and broadly reliable system or two that tracked the world’s thousands of hedge funds and graded them, with points or stars, thumbs up or down, based on which managers were overleveraged, which practiced poor risk management, which were merely trying to mimic successful strategies rather than create them? Clearly, there is interest in the idea. When Moody’s Investors Service started rating hedge funds in 2006, the industry was in ascent and drawing hordes of investors who wanted to know which funds to invest in and — equally important — which ones to avoid. Moody’s was glad to begin offering customers what they sought, and started conducting operational reviews of hedge funds, getting into background checks, liquidity and risk management. “Investors want to know about a fund’s internal behavior — Does the fund create a culture of risk? Does it take the appropriate processes to mitigate risk?” explains Brian Johnson, vice president of business development for Demand for a comprehensive and broadly accepted system to issue ratings on hedge funds has by no means disappeared. By Janice Fioravante Moody’s alternative investments group. Johnson notes that institutional investors are particularly fastidious: “Consistency, continuity, accountability — these factors are very important to institutions.” But parsing the operational strengths and investment acuity of hedge funds is an inherently difﬁcult task because they are not models of transparency. Two years after rolling out its ﬁrst hedge fund ratings, Moody’s has evaluated just 21 funds. Although the industry is struggling as investors run for the exits, the demand for ratings is far from dead. Chicagobased Morningstar, well known for its one- to ﬁve-star ratings on mutual funds, in February 2008 introduced star ratings based on risk-adjusted performance measures for about 2,000 single-strategy hedge funds and in October began doing the same for some 1,000 funds of hedge funds. “There’s a clamoring: ‘Where are your fund-of-funds ratings?’” says John Rekenthaler, Morningstar’s vice president DECEMBER 2008/JANUARY 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 41

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2008

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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