S&P to begin assessing the operational quality of hedge funds

Date: Friday, December 22, 2006
Author: Shamillia Sivathambu, HFMWeek.com

NEW YORK: Standard & Poor’s (S&P) is to begin “assessing” the operational risks of hedge funds in the New Year. The new “assessment” process, which will rank hedge funds between categories one and five, will be separate from its current hedge fund credit ratings, said Tanya Azarchs, managing director of S&P Financial Services Ratings.

The new operational ratings will be based on the governance and risk management policies of a hedge fund. Things like the segregation of duties, transparency and reporting, conflict of interests, tools and infrastructure, back office efficiency, valuation processes, liquidity and leverage will be taken into account, Azarchs said. A fund’s investment process and performance will not be a consideration. “Performance will be considered only in so far as the fund is able to generate enough fees to keep the light on,” she added.

The new hedge fund assessment process comes at a time when the industry has suffered a number of blow ups due in part to operational failure. “The aim is to make investors aware of what is going on [within the hedge fund] and avoid the star manager syndrome,” Azarchs noted. The new introduction of the assessments are in part driven by the growing by the number of institutional investors who are increasingly investing in single hedge funds but remain unfamiliar with its due diligence process having typically invested in funds of hedge funds, Azarchs said.