“This method … is appropriate for most traditional long-only strategies, but it can also underestimate the risk of alternative investment strategies that tend to have fat-tailed risk events,” stated AIMA and the CAIA Association. “However, IIROC traders often rate alternative funds at too high a risk, severely limiting their potential inclusion in retail portfolios and limiting investor access to these products, which can enable diversification, volatility protection and uncorrelated returns.”
To better reflect historical risk-adjusted data for alternative funds, the proposed guidelines for hedge funds and alternative mutual funds – including market-neutral equity, long-short, and relative value arbitrage strategies – rely on the mean lagging standard deviation of the funds within of the indices defined by the Center for International Securities and Derivatives Markets (CISDM).
With regard to private loan funds, the proposed guidelines state that the main risk considerations are seniority and subordination of a particular loan, as well as the level of compliance with covenants to protect the lender or investor by requiring disclosures and restricting borrowers. financial activities. On this basis, the risk is differentiated between funds, which are underpinned by, among other things, senior and secured loans, unitranche loans and leveraged loans.
“Alternative investments are diverse and must be properly and individually assessed based on the manager and strategy,” said AIMA and CAIA Association. “They play a key role in a balanced portfolio by providing diversification, risk reduction and uncorrelated returns to the investor.”