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.
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Claire Van Wyk-Allan
Managing Director, Head of Canada, AIMA
-
Steven Novakovic
Managing Director, CAIA Curriculum, CAIA Association
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Jiří Krόl
Deputy CEO, Global Head of Government Affairs and Global Head of the Alternative Credit Council
-
Nick Smith
Managing Director, Private Credit
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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 |
|
Source: CAIA Association, AIMA/ACC, 2022.