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Moody’s updates hedge fund operational quality rating methodology


In response to recent market events, Moody’s Investors Service has published an update to its methodology for assigning operational quality ratings to hedge funds.

"This methodology update contains a few refinements that incorporate recent experience within the hedge fund industry, but does not change the core concepts of our rating approach," says Odi Lahav, vice president in Moody’s global managed investments group. The revised methodology does not result in changes to any existing OQ ratings, but does provide a more transparent view into the specific components of our analysis.

Among the key revisions within the report, entitled "Operational Quality Rating Methodology for Hedge Funds", Moody’s has grouped its OQ rating factors into five key rating categories: operations, valuations, risk management framework, corporate functions and service providers.

The report also explains the details of Moody’s OQ rating scorecard, including the underlying assessments that make up Moody’s evaluation of the key rating categories and their relative weights.

Amidst the turmoil evident across financial markets over the past year, operational quality has emerged as an important issue for investors in the complex, fragmented and often opaque hedge fund sector.

"We believe that operational risk remains at the forefront of investors’ concerns about hedge funds, particularly given recent events," Lahav says.

Moody’s OQ ratings do not address market or investment risks, the hedge fund manager’s risk appetite or investment strategy, all of which are key considerations for investors. However, these factors do provide the context for a hedge fund’s operational infrastructure, and thus will be considered when evaluating operational quality.

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