Toronto – March 16, 2021 - AIMA and CAIA (‘the Associations’) have today published an updated risk rating system to promote the alignment of retail risk ratings at investment dealer firms with the historical risk-adjusted returns of funds within strategy indices.
Since the first edition published in January 2019, there has been noted positive movement of internal risk ratings to better align with investment funds’ historical, risk-adjusted returns. For example, the internal risk ratings for alternative mutual funds and alternative ETFs (collectively, “alternative mutual funds”) are often aligned with the prospectus risk rating. However, for hedge funds and private credit funds, dealer risk ratings continue to place higher risk ratings than may be warranted, thereby limiting the number of retail investors who can access these products and the percentage to which they can allocate.
To facilitate greater access to diversified, risk-reducing portfolio construction vehicles with non-correlated returns, the Associations advocate that additional risk ratings systems at investment dealers be revisited for alternative funds to better reflect historical risk-adjusted data from funds within indices. The Associations’ updated risk rating guidelines for hedge funds, alternative mutual funds and private credit are outlined in the tables below:
Proposed risk rating for hedge funds and alternative mutual funds based on the median trailing standard deviation of funds within CISDM indices
Low |
Low to Medium |
Medium |
Medium to High |
High |
|---|---|---|---|---|
| N/A | 0% to 6% | 6% to 11% | 11% to 16% | Over 16% |
| Market Neutral Equity | Equity Long-Short | Equity Long-Only | ||
| Multi-Strategy | Event-Driven | Emerging Markets | ||
| Long-Short Credit | CTA/Futures | |||
| Relative Value Arbitrage | ||||
| Global Macro | ||||
| Distressed (hedge funds) |
Source: CAIA Association, AIMA, CISDM. Data as of 11/30/2020.
Table 2 – Proposed risk rating for private credit funds based on S&P & Cliffwater indices
Low |
Low to Medium |
Medium |
Medium to High |
High |
|---|---|---|---|---|
| N/A | 0% to 6% | 6% to 11% | 11% to 16% | Over 16% |
| Senior/Secured | Unitranche | Leveraged | ||
| Mezzanine | ||||
| Distressed (private credit) | ||||
| Subordinated |
Source: CAIA Association, AIMA/ACC.
The 2nd edition of the AIMA/CAIA Risk Rating Guideline with specific rationale and considerations is available here.
Claire Van Wyk-Allan, Director & Head of AIMA Canada, commented: “It is important that retail investors have fair access to alternative investment funds that can provide diversification, risk reduction and non-correlated returns to their asset allocation mix. AIMA and CAIA are pleased to both update and expand offer our recommended risk rating system that more accurately reflects the historical risk-adjusted returns that these products can provide in balanced portfolios. It is interesting and important to note that with two additional years of data captured, including volatile months in 2020, the recommended risk ratings for hedge fund and alternative mutual fund remain unchanged, a testament to the soundness of this guideline. Canadian investors deserve the fair opportunity to access these strategies without requiring an unjustly high risk investing profile to do so.”
Keith Black, Managing Director of Curriculum and Exams at the CAIA Association, commented: "Alternative investments can be complex, in both liquid alternatives and lock-up fund structures. The CAIA Association advocates that all market participants become fully informed regarding alternative investment funds, including the benefits, drawbacks, and complexities. We are pleased to be working with AIMA to further the education of retail advisors and investors and promote guidelines that facilitate fair access to these asset classes."
Belle Kaura, Chair, AIMA Canada & VP Legal & CCO, Third Eye Capital, commented: “While progress has been made in risk ratings of liquid alternatives since release of the original guideline, hedge funds and private credit funds continue to be unjustifiably defaulted to high risk. Risk ratings aligned with true risk as a reflection of historical risk-adjusted returns will help eliminate barriers to distribution. This 2nd edition introduces a risk rating framework for private credit funds which are at a growth inflection point in Canada with lower risk appetite of banks and latent distress in the market due to weak credit fundamentals. Alternatives resoundingly proved their resilience and value during the global pandemic. Investor confidence and appetite remains high for uncorrelated strategies that reduce risk and dampen volatility in a diversified portfolio. It is imperative that investors have fair access to all alternatives at all stages of the market cycle, they should not be denied access due to inaccurate and unjustly high-risk ratings that can severely limit potential inclusion in portfolios.”
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AIMA
The Alternative Investment Management Association (AIMA) is the global representative of the alternative investment industry, with more than 2,000 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than $2 trillion in hedge fund or private credit assets. AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. AIMA works to raise media and public awareness of the value of the industry. AIMA set up the Alternative Credit Council (ACC) to help firms focused in the private credit and direct lending space. The ACC currently represents over 170 members that manage $400 billion of private credit assets globally. AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For further information, please visit our website, www.aima.org. AIMA was founded in 1990, with the AIMA Canada subsidiary formed in 2003.
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CAIA Association
The CAIA Association, a non-profit organization founded in 2002, is the world leader and authority in alternative Investment education. The CAIA Association is best known for the CAIA Charter®, an internationally recognized credential granted upon successful completion of a rigorous two-level exam series, combined with relevant work experience. Earning the CAIA Charter is the gateway to becoming a member of the CAIA Association, a global network of over 10,000 alternative investment leaders located in 80+ countries, who have demonstrated a deep and thorough understanding of alternative investing. Having grown rapidly, the CAIA Association now supports vibrant chapters located in financial centres around the world and sponsors more than 200 educational and networking events each year. The CAIA Association also offers a continuing education program, where investment advisors and dealers can learn the Fundamentals of Alternative Investments in a 20-hour, video-based program. For more information, please visit https://caia.org/programs/fundamentals.
