Risk Rating Guidelines for Hedge Funds, Alternative Mutual Funds & ETFs & Private Credit in Canada

Overview

4th edition - Updated as of April 2023

AIMA & CAIA update risk rating guidelines for alternative strategies in Canada
Now in its fourth edition, risk ratings remain unchanged, providing benchmark for dealers
Newly added this year: risk ratings for Convertible Arbitrage and Volatility Arbitrage

AIMA & CAIA are pleased to publish this updated fourth edition risk rating guideline for Canada to promote better alignment of retail risk ratings at investment dealer firms with the historical risk-adjusted returns of hedge funds, alternative mutual funds, alternative ETFs and private credit funds.

In the four editions, no strategies have changed category, despite markets experiencing enhanced volatility throughout. New additions to this edition include Convertible Arbitrage and Volatility Arbitrage. The Associations’ updated risk rating guidelines for hedge funds, alternative mutual funds and private credit are outlined below, with the full guidelines available for download.

Since the first edition was published in January 2019, there has been some positive alignment of internal risk ratings with investment funds’ historical, risk-adjusted returns, challenges remain, with many instances where private funds are automatically rated high risk, despite low historical volatility. This limits the number of retail investors who can allocate to these products, and limits how much they can allocate, despite these strategies often demonstrating lower volatility than broad indices.

To facilitate fair investor access to diversified, risk-reducing fund structures with non-correlated returns, the Associations advocate that internal dealer risk ratings systems be revised to better reflect historical risk-adjusted data from funds within indices.

Claire Van Wyk-Allan

Managing Director, Head of Canada, AIMA
Steven Novakovic

Managing Director, CAIA Curriculum, CAIA Association
Jiří Krόl

Deputy CEO, Global Head of Government Affairs and Global Head of the Alternative Credit Council
Nick Smith

Managing Director, Private Credit
Robert Lemon

Executive Director & Head of Clearing, CIBC Capital Markets

Table 1

Proposed risk rating for hedge funds and alternative mutual funds based on the median trailing standard deviation of funds within indices (CISDM, HFRI)

Low	Low to Medium	Medium	Medium to High	High
Not applicable to alternative strategies	0% to 6%	6% to 11%	11% to 16%	Over 16%
	Market Neutral Equity	Equity Long-Short	Equity Long-Only	Digital Assets
	Multi-Strategy	Event-Driven	Emerging Markets
	Long-Short Credit	CTA/Futures
	Relative Value Arbitrage
	Global Macro
	Convertible Arbitrage
	Volatility Arbitrage
	Distressed (hedge funds)

Source: CAIA Association, AIMA, CISDM, HFRI. Data as of 12/31/2022.

Table 2

Proposed risk rating for private credit funds based on S&P & Cliffwater indices

Low	Low to Medium	Medium	Medium to High	High
Not applicable	0% to 6%	6% to 11%	11% to 16%	Over 16%
	Senior/Secured	Unitranche	Leveraged Credit
			Mezzanine
			Distressed (private credit)
			Subordinated