Over the last few years, Fitch has fielded an increasing number of inquiries to rate hedge funds (also known as alternative investment funds) and related fund-of-funds structures, both in the U.S. and Europe. While the greatest interest has been in developing structured products, such as collateralized debt obligations (CDO) backed by hedge fund strategies, Fitch has assigned a limited number of counterparty and secured debt ratings.
The universe of assigned ratings, to date, have performed well, including during the stressful periods in the third quarter of 1998 and second half of 2000. This can be attributed, in part, to the conservative approach taken toward the asset class as a whole and a bias toward high-quality participants. Given the potential for dramatic losses and the industry's relative lack of transparency, this conservatism is fully warranted.