Risk ratings developed for hedge funds

Several of the world's largest ratings agencies are developing wide-ranging credit and risk ratings on hedge funds and their managers, pushing the $1,200bn hedge fund business further into the investment mainstream.

Hedge funds have been attracting investment from conservative investors such as pension funds. To do this, they had to convince investors that the perception of hedge funds as a risky investment is no longer valid.

According to Tanya Azarchs, managing director of financial services ratings at Standard & Poor's, the hedge fund market is meeting pressure for more transparency as it seeks to attract this broader spectrum of investors.

US regulators have been campaigning for more information about hedge funds to be made available to investors. The Securities and Exchange Commission is reconsidering the best way to police hedge funds after a US federal court threw out an SEC rule requiring funds to register with it.

S&P is developing a comprehensive set of ratings criteria that are expected to be launched before the end of this year. Moody's and Morningstar are working on similar products.

Ms Azarchs says participants including prime brokers, fund of fund managers and equity investors are taking a keen interest in assessments of the risks facing hedge funds and their managers.

S&P's ratings criteria are being developed to assess the creditworthiness of hedge funds and hedge fund managers. The ratings will reflect the likelihood of a fund defaulting on an obligation, such as a bank loan or other debt, or in the form of a derivative contract.

S&P said its ratings would incorporate all aspects of operational risk, and performance to the extent that it impacts liquidity.