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August 30, 2006
Rating firms take note of hedge funds
Credit rating agencies are working on boosting coverage of hedge funds in response to a growing need for transparency in the sector, but face analytical problems and, ironically, a lack of transparency in doing so.
Regulators around the world have been making ever louder noises about boosting transparency in the $1.2-trillion (£640 billion) hedge fund industry, with credit ratings seen as one way of providing an outside assessment of funds’ standing. The big three agencies already assign some ratings to hedge funds, although these are mainly to do with operational risk than credit risk or a fund’s performance.
Standard & Poor’s is working on a new set of criteria for rating hedge funds that is set to be published by the end of the year, a senior official at the agency said on Thursday.
“It’s a high-priority sector for us to develop,” said Scott Bugie, a managing director in the financial services group at Standard & Poor’s. “But it's a tough industry, very challenging analytically.”
S&P already assigns counter-party credit ratings to some hedge funds. Its funds group assigns ratings to the managers of funds of funds that reflect the quality of management and operations. They do not directly reflect performance.
Most of the lending to hedge funds is on a secured basis, Bugie said, and therefore demand from counter-parties for credit ratings is limited, although there are signs of growth in unsecured lending as the industry gets bigger.
Moody's Investors Service issues ratings based on operational risk, said Gary Witt, a managing director for alternative investment ratings at the agency in New York.
“We came up with this in response to discussions we had with institutional investors here in the US,” he said. “Operations risk is something they have concerns about, but also clear that it's a fairly labour intensive area to analyse.”
“(That) is the focus for the moment, but we definitely hope to expand beyond that,” Witt said.
Fitch Ratings has public credit ratings on a few hedge funds, but this business remains restricted to large funds that use the market to raise funding, said Charles Prescott, group managing director for financial institutions at Fitch.
“It’s difficult to overcome the challenges of transparency in rating hedge funds ... which partly explains why the growth in credit ratings for hedge funds has so far been limited,” he said.
-The Telegraph-
Posted by su at August 30, 2006 10:16 AM