A change of Mood

Date: Wednesday, June 24, 2009
Author: Laurence Fletcher, Reuters.com

Rating agency Moody’s has updated its hedge fund ratings process in the wake of the Madoff fraud and the collapse of Lehman Brothers.

The firm, which rates hedge funds on their operational risks, is putting more emphasis on certain aspects which it thinks could be key to investors.

For instance, having previously looked at 10 different categories of risk, the firm has narrowed this down to five — operations, valuations, risk management framework, corporate functions and service providers.

A hedge fund must now do consistently well in all of these categories, and not just in most of them, to get a high rating for operational risk overall.

In addition, a fund must as a minimum requirement score well in 3 core areas — the background and experience of its key staff, the independence and quality of auditors and the clarity of a fund’s strategy and the amount of information it is prepared to give.

Further aspects within its ratings system have been given additional weighting after a turbulent year in hedge funds.

“Given everything that’s happened in the hedge fund industry, with frauds, operational issues and blow-ups, we wanted to try to ensure that we addressed the majority of the relevant issues,” said Odi Lahav, vice president at Moody’s alternative investment group.

“Madoff was one thing, there were other frauds, there was also Lehman, which highlighted the diversification of prime brokers and funding sources. We also really wanted to be more transparent about how we do things.”