Interest in Securitization of Hedge Funds Continues to Grow, Moody's Reports

Date: Wednesday, July 9, 2003

Interest in Securitization of Hedge Funds Continues to Grow, Moody's Reports NEW YORK, July 9, 2003 -- Interest in securitizing hedge funds into collateralized fund obligations (CFOs) continues to grow as more funds become aware of the opportunity, according to Moody's Investors Service. Moody's will soon publish its methodology for rating CFOs; it will be available on www.moodys.com. Moody's rated two CFOs in 2002 -- Man Glenwood Alternative Strategies I and Diversified Strategies CFO S.A. -- and currently has proposals for two transactions in-house, according to Gary Witt, a Moody's vice president/senior credit officer. The class A tranches of both deals were rated Aaa. "The CFO concept has been gaining in popularity for a couple of years. We see a great deal of interest from the investment banks that are structuring these deals," Mr. Witt said. CFOs may provide institutions with an opportunity to invest in an alternative asset class whose performance is often not correlated with that of stocks or bonds. Moody's rating methodology relies heavily on the diversification achieved by a fund-of-funds strategy. Therefore, an investment in a CFO may allow an institution to achieve the diversification that would otherwise be difficult, time consuming, and expensive to achieve. In addition, CFOs may open access to hedge funds that are closed to new investors. Nevertheless, it's important for investors to understand that CFOs differ markedly from other types of collateralized debt obligations (CDOs), asset-backed securities (ABS), and syndicated loans. Due to the illiquidity and opacity of the hedge fund universe, Moody's will only rate a CFO if the fund of funds manager has a proven track record of successfully selecting diversified portfolios of hedge funds in accordance with specified selection criteria, taking into account factors such as concentration limitations, risk-adjusted returns, and the volatility of net asset values. "Perhaps in no other type of CDO is the manager's role more crucial," said Jerry Gluck, a Moody's managing director. "Virtually anyone with sufficient resources to hire a lawyer, accountant, and prime broker can form a hedge fund. Therefore, it is imperative that a skillful and diligent CFO manager be engaged." The methodology, titled "Moody's Approach to Rating Collateralized Fund of Hedge Funds Obligations," will describe Moody's approach to determining the credit risk a CFO investor might expect and the resulting ratings of CFO liabilities. Copyright 2003, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved.