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Fitch Monitoring Fund Of Hedge Fund Liquidity

Date: Wednesday, October 1, 2008
Author: Dow Jones Newswire

Fitch Ratings-London/Paris-30 September 2008: Fitch Ratings has heightened its monitoring of liquidity management at fund of hedge fund (FoHF) managers. In light of increased redemption activity in the fund of hedge fund industry, expectations for continued outflows and the magnified challenge of liquidity management for FoHF managers, Fitch is keeping a close surveillance of rated FoHF managers and the changing liquidity profiles of their funds.

This entails scrutinising changes in assets under management, structure and diversification of the fund investor base, scheduled and estimated redemptions, the FoHF's liquidity schedule, cash cushion, and other available liquidity facilities. These considerations are reviewed in the context of the FoHF's redemption terms.

FoHF liquidity risk stems from the fact that FoHF investors generally benefit from more frequent and flexible subscription/redemption opportunities than those typically offered to the FoHF itself for investment in the underlying hedge funds. If not closely assessed and managed this could result in the manager penalising the interests of remaining investors or even being unable to meet redemption requirements. Under liquidity stress, most liquid funds would be sold first and redemption penalty fees are likely to materialise, thus challenging FoHF's risk profile, strategy allocation, hedge fund diversification and, ultimately, performance.

In the Fitch-rated universe, most managers have so far implemented conservative measures to address the rising liquidity risk. Investors' commitment is being challenged by the current market environment and disappointing fund of hedge fund performance when compared to stated investment objectives. Fitch will continue to closely monitor liquidity management at rated FoHF managers and will provide commentary or take rating action as warranted.

Research and criteria reports on FoHF management is available on the agency's public website, www.fitchratings.com

Contact: Aymeric Poizot, Paris, Tel: +33 1 44 29 92 76; Charlotte Quiniou, +33 1 44 29 92 81; Olivier Fines, +33 1 44 29 92 75; Amit Mathur, +44 20 7682 7339; Manuel Arrive, +44 20 7682 7499.

Media Relations: Hannah Warrington, London, Tel: +44 (0) 207 417 6298.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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