Moody’s foray into the world of hedge fund ratings continues with the first badge doled out in Europe. The recipient, the Brevan Howard Master Fund, unsurprisingly bagged itself a OQ1 rating – excellent, or the highest rank available. “OQ” stands for “operational quality.”
Unsurprising for two reasons. Brevan Howard, the $16bn London-based global macro specialist, is one of Europe’s leading managers. It this month sold a 15 per cent stake to Swiss Re and earlier in the year floated the first hedge fund on London’s main market, the BH Macro fund. If their operational wherewithall isn’t found to be up to the highest standards, then others need not apply.
But also because Moody’s has yet to award a rating that falls below OQ1, or OQ1-. Since launching its operational quality ratings just over a year ago, it has issued 12 rankings, including to the likes of Fortress and Citadel in the US, 11 in the top bracket, and just one at the minus level.
Also, funds ranked have a one-off option not to make their rating public – and a handful ranked at the OQ2 and OQ2- levels have opted to keep that result a secret, though those have not been in Europe.
So are the badges meaningless? There’s some selection bias here – the list of ranked names is pretty illustrious reflecting the fact that it has generally been the largest, more established funds that have stepped up to be rated first. They’re the ones who are more likely to be chasing institutional money, from organisations that require, or at least find comfort in a piece of paper from the agency.
And this line of Moody’s business is only just getting off the ground, helped by heightened focus on governance and operational risk (post blow-ups) and increasing institutional allocations to alternative investments. The agency believes the demand is there – Moody’s says they have a couple of other smaller European funds in the pipeline.
The business for Moody’s is embryonic – and checking everything from valuation processes to partners’ university diplomas and parking tickets is costly against the fees being charged at present. The idea is that a combination of institutional pressure and herd behaviour will take over and sooner or later, everyone will want one – and feel compelled to reveal it.