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Fitch launches fund of hedge funds manager ratings

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Fitch Ratings is launching fund of hedge funds manager ratings that aim to provide an independent assessment of manager capabilities, with particular focus on the specialised resources, ex

Fitch Ratings is launching fund of hedge funds manager ratings that aim to provide an independent assessment of manager capabilities, with particular focus on the specialised resources, expertise, decision-making, risk management and portfolio management processes needed to provide effective management of funds of hedge funds.

Its approach is based on the framework used by the agency to rate managers in other asset classes such as fixed income, equity, balanced funds, real estate and collateralised debt obligations, while incorporating factors and rating definitions that reflect the specifics of hedge fund multi-management.

The agency notes that the recent growth in funds of hedge funds has been accompanied by a marked increase in the number of organisations offering fund of hedge funds products with varying performance records. These developments are fuelling the need for greater scrutiny of managers, the firm says.

Fitch’s asset manager ratings process is based on defined quantitative and qualitative criteria to measure the manager’s current qualifications and prospective capabilities. This approach provides an aggregation of the rating factors into five groupings designed to allow better recognition of an organisation’s strengths and weaknesses.

The groupings are company and staffing, fund/manager selection, portfolio and risk management, investment administration and technology. The rating methodology seeks to promote the consistent application of criteria while minimising subjective variations in scoring qualitative characteristics.

Fitch will use a five-step rating scale ranging from the highest rating to FoHFM1 to FoHFM5. Each rating factor is scored on a scale of 1 to 5 and assigned a relative weight within the grouping of factors to generate an overall group score. Group scores are assigned relative weights in determining the overall rating.

To achieve increased transparency of its ratings decisions, Fitch will publish the scores attained by the rated asset manager for each group of criteria factors.

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