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

Overview

3rd edition - Updated as of August 2022

AIMA and CAIA are pleased to publish this updated risk rating guideline 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.

Since the first edition was published in January 2019, there has been noted positive movement of internal risk ratings to better align with investment funds’ historical, risk-adjusted returns. However, higher risk ratings than may be warranted may still be assigned, thereby limiting the number of retail investors who can access these products and the percentage to which they can allocate in investment portfolios.

To facilitate greater access to diversified, risk-reducing portfolio construction vehicles with non-correlated returns, AIMA and CAIA 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.

Claire Van Wyk-Allan

Managing Director, Head of Canada, AIMA
Keith Black, PhD, CFA, CAIA, FDP

Managing Director of Content Strategy, CAIA Association
Jiří Krόl

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

Table 1

Table 1 - 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

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