What’s Wrong With Hedge Fund Operational Risk
Ratings and Certifications?

Major Risks and Concerns

Franchise Risk – Both certified and highly rated hedge funds have failed for primarily operational reasons
Conflict of Interest – Persistent investor concerns from having the hedge fund under evaluation also serve as the paying client
Cookie-Cutter Approach – Lack of customization in most operational rating agencies reviews has led to the creation of “canned” reports
Poor Market Perception – Operational ratings and certifications are primarily seen as a marketing tool by investors and hedge funds
Information Decay – Ratings and certifications are as of a specific point in time and quickly lose relevance during periods of organizational change
No On-going Monitoring – Ratings and certification agencies often do not pro-actively monitor hedge fund operational risks in between rating cycles, instead self-reporting is required by the hedge fund
No On-going Support – Hedge funds are often left with little real-world guidance on operational risk management and due diligence meeting preparation after a ratings or certification review is completed
Limited Scope – Operational ratings and certifications do not incorporate all the major operational risks of concern to hedge fund investors including reputational risks and meta risks
Few Actionable Recommendations – Hedge funds generally are provided with few actionable steps to effectively capitalize on operational strengths and minimize weaknesses