S&P HF Operational Risk Ratings To Debut

Standard & Poor’s expects to introduce early next year a new product that will evaluate hedge funds’ operational risks. If the news sounds familiar, back in September, S&P announced it was enhancing hedge fund credit ratings by including operational risk factors. The latest development takes it a step further, as the S&P is planning a separate product that will evaluate the funds, as nervous investors increasingly clamor for greater transparency before putting money into alternative investments – and who like the idea of a rating to help them decide where to invest. The new product, explained S&P Managing director Tanya Azarchs in a Lipper HedgeWorld interview, will “address the issues that are important to a broader set of investors than merely the credit counterparties.” Right now, S&P rates hedge funds based on the risk of defaults, a primary concern for prime brokers and lenders. Scheduled for the first quarter of 2007, it will consider a laundry list of factors, says Azarchs, such as asset verification, fund administrations, leverage, liquidity and valuation. Thrown into the mix will be relationships with prime brokers, manager background checks and back-office procedures. The rating product should make a lot of people happy, investors and managers alike. “Investors want a second opinion or a more in-depth due diligence analysis than what they may have been able to do,” Azarchs told Lipper HedgeWorld. “And fund managers want it because they spend an awful lot of time with a wide variety of investors going over due diligence issues over and over again. It’s very convenient and time-efficient to have it done by an independent party.”