AIMA and CAIA launch fifth edition guidelines to align fund risk ratings with real returns
The Alternative Investment Management Association (AIMA) and the Chartered Alternative Investment Analyst (CAIA) Association announced today the release of the fifth edition of their risk rating guidelines for hedge funds, alternative mutual funds, and private credit funds in Canada.
This update aims to align retail risk ratings at investment dealer firms more closely with the historical risk-adjusted returns of funds within strategy indices.
Despite the market's heightened volatility in recent years, the risk categories proposed in the guidelines have remained consistent across the five editions published over the past six years.
The only exception is the category of convertible arbitrage, which has been adjusted from low-to-medium to medium.
The guidelines offer a detailed risk rating for hedge funds and alternative mutual funds based on the median trailing standard deviation of funds within specific indices (CISDM, HFRI), categorizing strategies from "low" to "high" risk.
Notably, strategies such as market neutral equity, equity long-short, and digital assets are evaluated alongside other strategies, providing a comprehensive benchmark for dealers.
For private credit funds, the risk rating is based on analyses from S&P and Cliffwater indices, further enriching the guidelines' scope.
Since the first edition's release in January 2019, there has been selective alignment by investment dealer firms of their internal risk ratings with the historical, risk-adjusted returns of alternative funds.
Nevertheless, many alternative funds, particularly those not covered by a prospectus, are still automatically rated as high risk.
This classification limits the number of retail investors who can allocate to these products and restricts the amount they can invest, despite these strategies often demonstrating lower volatility than broader indices.
The associations advocate for dealer internal risk ratings systems to align with historical risk-adjusted data from funds within indices, as per this guideline, to ensure Canadian retail investors have fair access to diversified, risk-reducing fund structures with non-correlated returns.
Claire Van-Wyk-Allan, managing director and head of Canada at AIMA, stated, “With proven methodology through volatile market activity, AIMA and CAIA stand behind our risk rating guidelines that more accurately reflect the historical risk-adjusted returns that these strategies can provide balanced portfolios.”
She emphasized the need for Canadian dealers to align internal risk ratings to enable retail investors to access alternative investment funds for diversification, risk reduction, and non-correlated returns without being hindered by a high-risk profile.
Steven Novakovic, managing director of CAIA Curriculum, remarked on the partnership's success in producing valuable guidelines for allocators, reflecting AIMA and CAIA's commitment to prudent and careful investing in alternatives.
Belle Kaura, chair of AIMA Canada Executive Committee and Board of Directors, highlighted the guideline's proven sound methodology even through market volatilities, emphasizing the necessity of changing how Canadian dealers approach risk ratings.
She noted, “For the Canadian alternatives industry to flourish, it is crucial to eliminate barriers to distribution.”
