managed funds oq methodology

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Managed Investments Moody’s Global

Rating Methodology

Table of Contents: Methodology Update 1 Overview 1 Moody’s OQ Rating Definition and Scale 2 Moody’s universe of OQ rated hedge funds 3 Operational risk in hedge funds 3 Moody’s rating screening criteria 5 Framework for assigning OQ ratings 6 Operational Quality Rating Process 20 Moody’s Related Research 22 Website Access 22

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June 2009

Operational Quality Rating Methodology for Hedge FundsMethodology Update

This report provides an update to “Moody’s Approach To Evaluating And Assigning Operations Quality ratings to Hedge Funds”, which was originally published in 2006. This update does not reflect a significant change in approach, but does contemplate recent market experience as well as other considerations including the recent market turmoil, the evolution of best practice standards for the hedge fund industry espoused by various industry bodies and Moody’s desire to provide greater clarity and transparency into our rating approach. However, somewhat greater consideration is now given to certain aspects of our analysis and some elements of our approach have been refined and updated, including:

The rating factors have been grouped into five key rating categories and a rating scorecard has been introduced to communicate the relationship of those assessments to the rating more clearly.

The key category weights have been fixed, with continuing accommodation for analyst judgment in the assessment of the rating factors.

Effective overweighting of rating factors where significant weaknesses are identified.

Overview

The hedge fund industry landscape has changed dramatically in the past few years, first with the rapid growth in the number of hedge funds and assets under management. This was followed by the stresses caused by the economic downturn which started in 2007 and were exacerbated in the latter part of 2008.

The extreme market dislocation of 2008 was characterised by the failure of Lehman Brothers, the US government’s intervention into AIG, Fannie Mae and Freddie Mac, and the severe turmoil faced by other major financial institutions resulting in an acute liquidity shortage.

Moody’s Operational Quality Rating does not address market or investment risks. Rapid loss in hedge fund investments can occur even when operational risk is low. Portfolio losses can occur for many reasons including price volatility in fund assets which may be compounded by leverage, liquidity and other market factors.

2 June 2009 Rating Methodology Moody’s Global Managed Investments – Operational Quality Methodology for Hedge Funds

Rating Methodology Moody’s Global Managed Investments

Operational Quality Methodology for Hedge Funds

This was followed by the massive fraud allegedly committed by Bernard L. Madoff. Many hedge funds, like almost all financial market participants, have been materially impacted by these market events; however, dispersion of performance has been wide across funds and across strategies, and as ever, it remains difficult to draw general conclusions about the industry as a whole.

Operational risk in particular remains at the forefront of investors’ concerns about hedge funds, which among institutional investors, manifests itself in an extensive and time consuming due diligence process. As a complement to the analysis performed by hedge fund investors themselves in their initial and on-going due diligence process, Moody’s continues to offer published, monitored Operational Quality (OQ) ratings. Moody’s OQ ratings do not address market or investment risks, the managers’ risk appetite or the investment strategy, all of which are certainly key considerations for investors. However, these factors do provide context for a hedge fund’s operational infrastructure and thus will be considered when evaluating operational quality.

Moody’s OQ Rating Definition and Scale

Definition

A Moody's hedge fund Operational Quality (OQ) rating expresses an opinion on the quality of a fund's operations in the context of its stated objectives and investment strategy. The areas of review are: operations, valuations, risk management framework, corporate functions and key service providers. Our definition of what constitutes operational risk is similar to that used in Basel II1.

Scale

The hedge fund OQ rating has five broad categories, with OQ1 as the highest and OQ5 as the lowest, as depicted in the table below. A “+” modifier indicates that the fund ranks in the higher end of the designated rating category, while a “-” modifier indicates the fund ranks in the lower end of the designated rating category.

Table 1

Moody’s OQ Ratings Scale

Rating level Definition

OQ1 OQ1-

Excellent Funds rated OQ1 are judged to have excellent operational quality within their stated objectives and investment strategy

OQ2+ OQ2 OQ2-

Very Good Funds rated OQ2 are judged to have very good operational quality within their stated objectives and

investment strategy

OQ3+ OQ3 OQ3-

Good Funds rated OQ3 are judged to have good operational quality within their stated objectives and

investment strategy

OQ4+ OQ4 OQ4-

Fair Funds rated OQ4 are judged to have fair operational quality within their stated objectives and

investment strategy

OQ5+ OQ5

Poor Funds rated OQ5 are judged to have poor operational quality within their stated objectives and investment strategy

1 “Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This

definition includes legal risk, but excludes strategic and reputational risk”. Basel Committee on Banking Supervision, (June 2004), International Convergence of Capital Measurement and Capital Standards, section 644 on Operational Risk.




Moody’s Universe of OQ Rated Hedge Funds

The total assets under management of all the funds actively rated by Moody’s totalled approximately US$80 billion as of 30 April 2009. Names and details of the specific rated funds can be accessed on Moody’s website (see page 22 for further details).

Operational Risk in Hedge Funds

“Hedge funds do not represent a single asset class but are a type of investment vehicle that provides exposure to a range of investment strategies. Hedge funds come in different sizes and have different management strategies and styles2.”

This statement highlights the diverse and fragmented nature of the hedge fund industry and some of the problems associated with trying to draw general conclusions. Hedge funds are often characterised by trading in complex strategies, dealing with large sums of money and often taking exposure to risks that are not typical of traditional investment vehicles. Furthermore, unlike traditional investment vehicles, hedge funds are typically only lightly regulated3 as in many cases they either fall outside local regulatory rules related to investment funds or are domiciled in offshore jurisdictions, and hence many funds have also historically offered limited transparency to investors. All these characteristics lend themselves to the increased likelihood of operational risks, in addition to idiosyncratic market risks.

Given the nature of operational risk and the specific considerations that need to be taken into account for each individual hedge fund based on developments at both the fund and at the fund manager over time, investors often seek to monitor and update their understanding of a fund’s operational quality. This is particularly important in an industry which has been somewhat volatile recently, with periods of rapid growth followed by declines and the possible changes in regulation, which can affect the nature of a fund’s strategy or composition, its operational landscape and the manager’s flexibility, among other things.

Table 2

Some Notable Hedge Fund Failures and Their Causes*

Name of Hedge Fund Year of Failure or Wind-up

Est'd AUM (US$)** Primary Causes of Failure

LTCM 1998 4.7 billion Liquidity, concentration

Tiger Funds 2000 22 billion Investment performance

Manhattan Fund 2000 575 million Alleged Fraud

Lipper Convertible Fund 2002 365 million Alleged Fraud

Beacon Hill Asset Management 2002 300 million Alleged Fraud

Lancer Group 2003 1.1 billion Alleged Fraud

Bayou Hedge Funds 2005 450 million Alleged Fraud

Bailey Coates Cromwell Fund 2005 1.3 billion Investment performance

Marin Capital 2005 2 billion Concentration, leverage

Aman Capital 2005 340 million Investment performance

Amaranth Advisors 2006 9 billion Concentration, liquidity

Archeus Capital 2006 3 billion Operational error

Sowood Capital Management 2007 3 billion Liquidity, investment performance

Bear Stearns Credit & ABS Funds 2007 1.6 billion Liquidity, leverage, concentration

2 Principles and Best Practices for Hedge Fund Investors, Report of the Investors’ Committee to the President’s Working Group on Financial Markets,

January 15, 2009. 3 At the time of writing this report, the regulatory framework for hedge funds across a number of jurisdictions looked likely to change in future with an emphasis

on additional disclosure requirements.




Some Notable Hedge Fund Failures and Their Causes*

Name of Hedge Fund Year of Failure or Wind-up

Est'd AUM (US$)** Primary Causes of Failure

Dillon Read Capital Management (UBS) 2007 1.2 billion Concentration

Drake Management 2008 5 billion Investment performance

Peloton Funds 2008 2 billion Liquidity, leverage, concentration

Carlyle Capital Corporation 2008 670 million Liquidity, leverage, concentration

Fairfield Greenwich Sentry Fund 2008/9 6.9 billion Alleged Fraud***

Kingate Global Fund 2008/9 2.7 billion Alleged Fraud***

Weavering Capital 2009 640 million Alleged Fraud

* Based on Moody’s review of published accounts in the press ** The estimated AUMs figures are based on reported AUMs at peak or from estimated losses at time of failure as reported in the press *** These were feeder funds to Bernard L. Madoff Investment Securities, LLC (“Madoff”), an investment advisory business. Madoff itself was not a hedge fund and came to light in December 2008, after allegedly running a massive fraud in the form of a Ponzi scheme.

Industry Best Practice Standards

In addition to the above concerns, given the amount of interest generated by hedge funds, there has been a significant drive towards developing best practices and improving the public’s understanding of hedge funds and the transparency of the industry. Over the years, there have been several initiatives by industry bodies, such as The Alternative Investment Management Association Ltd (AIMA) in UK and The Managed Funds Association (MFA) in the US, to promote sound practices and publish various guidelines within the sector.

In addition, in the US, the Asset Managers’ Committee4 and the Investors’ Committee5 of the President’s Working Group (PWG)6 recently published a set of best practices for the hedge fund industry and hedge fund investors in an effort to promote strong practices commensurate with the increasing role of hedge funds in financial markets.

In 2007, the Hedge Fund Working Group7 (HFWG), consisting of 14 leading European hedge fund managers, was set up with the aim of improving disclosure to investors and developing best practice standards. The group published its report on Hedge Fund Standards in January 2008; these standards are maintained by the Hedge Fund Standard Board (HFSB). The HFWG report states that “managing and mitigating operational risk is important for a sound approach to risk management by hedge fund managers. Operational risk includes breakdowns in internal controls, systems and corporate governance and unexpected disasters which can lead to financial losses from failure to perform, error and fraud”.

Moody’s Operational Quality rating methodology details the key features that we consider in our assessment of operational risk in hedge funds and incorporates some of the items that are detailed in the standards of practice and research produced by AIMA, MFA, PWG and HFWG.

4 Best Practices for the Hedge Fund Industry, Report of the Asset Managers’ Committee to the President’s Working Group on Financial Markets, January 15,

2009. 5 Principles and Best Practices for Hedge Fund Investors, Report of the Investors’ Committee to the President’s Working Group on Financial Markets,

January 15, 2009. 6 The PWG was established by Executive Order in 1988. The PWG was given the mandate to enhance the integrity, efficiency, orderliness and

competitiveness of US financial markets and to maintain investor confidence. In February 2007, the PWG released a set of principles to guide financial regulators as they addressed the growth of hedge funds.

7 The Hedge Fund Working Group, Hedge Fund Standards, January 2008.




Initial Fund Screening

As a preliminary step in assigning an OQ rating, Moody’s seeks a basic understanding of the nature of the fund, with particular focus on the areas detailed below:

1. Key Staff

An important driver of the quality of any organisation is the quality of its people. As an initial step in the assessment of operational quality, Moody’s obtains information about the background and experience of the fund’s key staff and principals. While naturally limited in scope, we believe that this information may serve to highlight any issues about the professional or educational track record of key personnel that could be relevant to our assessment of operational quality.

2. Auditors

The examination of a hedge fund’s financial statements by independent auditors represents an important source of comfort for investors and provides some information about the control environment as evaluating internal controls is part of the audit process. Beyond considering the existence and contents of such audited financial statements, and any associated internal control reports, Moody’s also considers whether the profile of the auditing firm suggests capabilities commensurate with the size and complexity of the fund.

3. Transparency and Fund Strategy

Another basic screening inquiry undertaken by Moody’s analysts as part of the rating process is assessing the manager’s ability and willingness to articulate the fund’s investment strategy. If the strategy is unclear and/or appears to be inconsistent with the results that the fund has achieved, confidence in the quality of operating processes may be difficult to attain. Moody’s will also seek to confirm that the fund is prepared to provide access to sufficient, relevant information so that a rating can be assigned and maintained.




Framework for Assigning OQ Ratings

This section provides details of our approach in assigning OQ ratings. The section is divided into two parts: the OQ rating “scorecard” (Part A below) and the key rating factors underpinning our assessment (Part B). In Part A, we provide an overview of the scorecard and of our scoring mechanism and in Part B, we discuss why each category is important to our ratings and the different factors we look at within each category. This methodology is not an exhaustive treatment of all factors reflected in Moody’s OQ ratings, but it should enable the reader to understand the key considerations used by Moody’s in the final rating determination.

A. Rating Scorecard

As part of the rating assignment process, analysts complete a rating scorecard (see Table 3 below) which summarises component assessments leading to the OQ rating. While some aspects of operational risk assessment may be difficult to quantify, for qualitative ratings, it is nevertheless useful to have a numerical guide to promote consistency between ratings. It is important to note that the scorecard is only a tool to help Moody’s analysts and rating committees in arriving at a rating decision. Other qualitative and quantitative factors will likely be considered by the rating committee to determine the final rating outcome.

The rating scorecard contains a large number of underlying assessments, including some “must have” features, which encompass the mechanics of a fund’s operational and control environment. The questions are compiled into sub-categories and (major) categories and are then aggregated, using a weighted average, into a single score which then maps to an indicated rating. Analysts then make rating recommendations based on the results of the scorecard and other qualitative considerations. Rating decisions are then made by a Rating Committee (see page 21 for more details).

1. Key Rating Categories

The rating factors, and hence the scorecard are divided into five key categories of assessment, namely Operations, Valuations, Risk Management Framework, Corporate Functions and Service Providers. Each category has defined weights which have been set according to their perceived importance in a fund’s overall operational framework and have been based on a large, moderately complex fund.

Three of the four core areas -- Operations, Valuations and the Risk Management Framework -- account for 70% of the total weights as in Moody’s view, they represent the crux of the fund’s operational framework. The Corporate Functions, which consists of the general internal functions of the firm (namely compliance and legal, systems and business continuity, human resources and finance and taxation), represents a further 20% of the overall weighting. The final category, which relates to the use of third-party external service providers, represents 10%.

There are several sub-categories within each of these five categories, each having defined weights which have again been set based on their perceived importance.

2. Consistency of the Rating Categories

Once the category scores are calculated, a number of adjustments may be made before the final rating is determined. One of these potential adjustments is to ensure consistency between the ratings of the four main categories (Operations, Valuations, Risk Management Framework and Corporate Functions) and the overall score rating assigned. For example, if the Valuation category is rated as an OQ3+, and all the other rating categories are awarded an OQ1 (i.e. the highest rating), then the rating committee may conclude that the overall rating should be more closely aligned with the Valuation category ratings and the overall fund rating could be OQ2, irrespective of the implied rating calculated using standard weightings. Moody’s considers this consistency adjustment to the overall rating as an important aspect of the OQ ratings, because operational quality is not simply a composite characteristic but can be compromised by “weakest link” elements within the overall operating structure.

The summary below provides an outline of the scorecard used.




Table 3

Moody’s OQ Rating Scorecard

Categories Default weights

Computed Score

Adjusted Score Outline of Subcategories

25% x x 1) Trading Infrastructure (Systems, people, process and documentation)

2) Trade Flow (Execution to settlement )

3) Wire Transfers (controls around cash/wire transfers)

Operations

4) Investor Relations

25% x x 1) Valuation Process and Controls

2) Valuation Policies and Documentation

Valuations

3) Valuation Oversight

20% x x Investment Risk Management Liquidity Risk Management

1) Governance 1) Asset Liquidity

2) Tolerance and Identification 2) Cash Management

3) Monitoring and Controls 3) Funding

4) Ex-post Outcomes Analysis 4) Collateral Management

5) Communication to Investors 5) Counterparty Credit Risk Management

Risk Management Framework

6) Link with Liquidity Risk Management 6) Redemption Terms

20% x x 1) Compliance & Legal

2) Systems and Business Continuity

3) Human Resources

Corporate Functions

4) Finance and Tax

10% x x Use of Service Providers (level of external involvement/oversight):

1) Administrator

2) Prime Brokers

3) Auditors

Service Providers

4) Other 3rd-Party Service Providers

Other Considerations

- Overall Governance Adjustment

- Weighting Consideration Adjustment

Adjustment

x Total (Overall Result)

Minimum Requirement Tests: Pass/Fail




3. Analyst Adjustments

In addition to the scoring described above (the “Computed Score”), there is also scope for the analyst’s qualitative judgment which is summarised in the “Adjusted Score” column. The adjusted scoring is very important to our analysis given that the rating is essentially qualitative in nature and therefore the analyst’s input is an important component of the ratings process and captures items that could not otherwise be captured in a generic scorecard.

Additionally, the analyst may recommend an adjustment to the rating if they determine that the category weights are not appropriate in light of the fund's characteristics. For example, the relative importance of the Operations section will be different for a multi-strategy fund characterised by high trading volumes than for a concentrated long-short equity fund, such as an activist fund. This adjustment would be reflected in the “Weighting Consideration Adjustment” section of the scorecard.

In any case, it is important to note that where the adjusted score for a particular rating factor deviates from the computed score, the rationale for these adjustments will be explicitly discussed by the rating committee (a brief overview of the Moody’s rating committee process is provided in page 21).

4. Other Considerations

Other considerations, beyond the key rating elements, which are not well suited for an analysis of tangible characteristics, include corporate governance (detailed below) and management quality (for instance, experience and track record of management). While these factors are not explicitly rated as part of the scorecard, they are overarching considerations and may have a bearing upon the rating outcome.

Corporate Governance and Oversight

Given the generally more lightly regulated and less transparent nature of hedge funds, it is reasonable to focus on the fund’s overall governance culture and structure. However, this can vary depending on how the fund has been set up and where it is domiciled. Typically, the highest level of a governance structure would be a board of directors, however:

In the US, funds aimed at US investors are generally set up “onshore”, that is, in the form of limited partnerships or limited liability companies, primarily for tax purposes. The manager typically acts as the general partner and there is no separate board of directors of the fund.

For non-US investors and US tax-exempt investors, funds are generally domiciled “offshore”, typically in low (or zero) tax jurisdictions. These funds are usually required to have a board of directors, which is ultimately responsible for the fund.

Nevertheless, our view is that even if the fund has a board of directors, the way in which boards are typically appointed for hedge funds, as well as the fact that investment decisions are effectively made by the Fund Manager and, in some cases, the nature of the rules governing the activities of the board in offshore jurisdictions, means that fund boards can be a less effective means of oversight than those of public companies in major jurisdictions8. As such, our view is that governance and oversight are primarily the responsibility of the fund Manager and its senior management. Thus, the focus of our review in this area will be on the oversight structure and internal controls for investor protection, transparency and general use of best practices at the Fund Manager level.

8 “while independent board oversight may provide some benefit to investors, the level of investor protection provided by hedge funds’ boards of directors often

falls short of the protections provided by similar governing bodies, such as U.S. public company boards of directors”, Principles and Best Practices for Hedge Fund Investors, Report of the Investors’ Committee to the President’s Working Group on Financial Markets, January 15, 2009.




Chart 1

Typical (simplified) hedge fund structure

The Fund(Master Fund)

US and non-US TaxExempt Investors

TradingMarkets

Main Third Party Service Providers and Key Services

Prime BrokersCustody, settlement, margining, funding, securities lending

AdministratorsMiddle and back office, transfer agency, investor reporting

AuditorsAudit services for the Fund's annual accounts

The Investment Manager

The Manager

Delegation

The Investment Adviser

US Feeder Fund(Limited Partnership)

US Investors

Offshore Feeder Fund(Offshore Company)

Fund GoverningBody/Board of

Directors

Advice

InvestmentManagement

Management

The nature and complexity of the oversight structure will also depend on the size and complexity of the fund. For instance, it may be appropriate for smaller hedge funds to have a more informal set of governance arrangements while in larger funds greater importance is placed on strengthening the fund governing body and emphasising the independence between the latter and the Manager9.

At the senior management level (of the Manager) there can be different structures in place depending on the size and complexity of the fund. This can range from one person being the ultimate point of escalation to having internal committees in place. In Moody’s opinion, the use of committees as the ultimate point of escalation is positive and (assuming the committee composition is appropriate) ensures that the relevant parties are involved in the decision-making and hence, is a beneficial control. However, having an appropriate individual or smaller group as ultimate decision-makers, which can be achieved by having a committee chairman and/or veto rights for the appropriate people, is regarded by Moody’s as good practice.

Table 4 outlines some of the committee characteristics that we seek to confirm during our review (these apply to both high-level, management committees, as well as functional line-level committees utilised within the categories of our review):

Table 4

Internal Committee Characteristics Composition Involvement of all relevant parties

Appropriate independence particularly for key decision makers

Appropriate mix of expertise and functions of the committees (relevant backgrounds)

Mandate Appropriate mandate for committees

Comprehensiveness of the mandate, given its ultimate aim

Conflicts of interest, if any, are managed and kept to a minimum

Delegation to individuals or working level committees is reasonable and appropriate

Culture of open conversation between committee members

9 “It should be noted, however, that even in these circumstances at times of stress the nature of the relationship between the Manager, the fund governing

body and the investors can be tested. It may therefore be the case that a more robust, advanced governance model could be an advantage even for these more informal types of hedge fund”, Fund Governance, p. 87, The Hedge Fund Working Group, Hedge Fund Standards, January 2008.




Internal Committee Characteristics Frequency of formal meetings is sufficient given the mandate, for example, weekly risk

committee meetings, annual disaster recovery/business continuity meeting Meeting Frequency

Ad-hoc meetings during stressed periods.

Documentation Minutes of meetings are readily available, to illustrate proof of effectiveness

Executables are effected and recorded in the minutes

Other fund policies make reference to committees and are consistent with the mandates

Line managers may also have various oversight roles within their mandates, which have been delegated to them by senior management or senior level committees. These are typically functional by nature and involve oversight on day-to-day issues under the Managers’ purview. During our review, we look at the mandate and presence of appropriate skill sets.

Moody’s also establishes whether there is an “internal audit”-type function which, although not typical in many hedge funds, is viewed positively and helps ensure internal quality control. This is particularly true for larger funds where senior management is further removed from the many functions that may be performed daily.

Lastly, the Fund Manager’s oversight of third parties is also important. Of course in many cases the use of independent third-party service providers, such as an independent administrator, is a positive control for investors. However, outsourcing key functions performed on behalf of the fund poses certain risks to the fund as the control of the function no longer rests with the Fund Manager. Hence Moody’s reviews whether the Manager monitors and ensures that the services and controls in place at the service providers are of high quality. The greater the dependence of the Fund and the Manager on the service providers, the greater the emphasis Moody’s places on this oversight.




B. Key Scorecard Rating Categories

There are five broad categories assessment of a fund’s operational quality listed below that are considered by Moody’s in its OQ rating process and scorecard, each of which comprises a number of sub-categories which are made up of a number of even more granular rating factors (see also Table 3, Page 7). The categories are:

Operations

Valuations

Risk management framework

Corporate functions

Service providers

The purpose of this section is to discuss the categories and sub-categories of the OQ rating, outline why we analyse each and provide some of the key characteristics that we look for in our analysis.

Category 1: Operations

Why it matters

The Operations function is crucial to a hedge fund (and thus to our analysis) as once the trading decision is made, trades need to be executed efficiently, booked, reconciled and settled correctly so that the fund’s positions are known and reported accurately. This information forms the basis of the fund’s activities and is necessary for traders and portfolio managers to trade off the correct positions. The information is also important in other key areas of our analysis such as valuations and risk management. Thus, the accuracy and efficiency of the operations processes is essential.

Assessment areas

Trading Infrastructure

Trade Flow

Cash Transfers

Investor Relations

Our assessment

In this category, the Moody’s OQ rating entails an examination of trade-flow (or trade life cycle) processes and procedures, which also includes a review of all outsourced service providers who are involved in this function, especially the administrator. Our approach “looks through” which party is responsible for actually performing the various tasks, and focuses on the activities themselves. The positive effects of using an external administrator, such as increased independence, will be captured in the Service Providers Category, Page 19.

Chart 2

Summary of the Trade-Flow Process

TradingDecision

Affirmation/Confirmation

Trade feedsEntry & Verification

TradeExecution

TradeCapture

Reconciliations Settlement

Moody’s carries out a detailed analysis of the controls and procedures surrounding the trade-flow process summarised in Chart 2 above. This entails a review of all pre-trade and post-trade controls in place, including the trade support system(s) used and the process for setting up new trading counterparties.




The review also encompasses the checks in place to ensure that during the trade-flow process all transactions are appropriately recorded and classified. A critical part of the review is the assessment of the reconciliation processes. Moody’s examines, inter alia:

The procedures in place to ensure that all trades, positions and cash are reconciled

The process by which trade errors (or “breaks”) are identified and resolved

The escalation procedures in place to ensure that reconciliation differences are resolved promptly

Moody’s also reviews the level of automation of operations functions and particular attention is paid to the flow of information between the fund and its prime brokers and administrators. We also look at the procedures and systems in place for handling trade confirmations to ensure that all trades are promptly confirmed and/or matched with counterparties.

Additionally, the processing of cash transfers to/from the fund from/to third parties forms part of our analysis. We look at the controls surrounding these transfers in order to assess the adequacy of the controls in place to prevent fraudulent and inappropriate use of cash, including the use of authorised signatory lists and appropriate checks and balances, typically built into the systems and reconciliation processes10.

The assessment also addresses shareholder activity, which typically falls under the purview of an Investor Relations team (either at the fund or administrator). The review includes controls surrounding subscriptions, redemptions, switches, anti-money laundering “AML” checks and procedures. Moody’s also reviews the investor communication processes, including investor documentation and reporting.

Our review is tailored to the size of the organisation, and focuses on the effectiveness of the function and the controls in the context of the fund’s size and strategy. Expectations from smaller firms/funds, which in all likelihood have concentrated functions that process all transactions, differ from larger firms, which may have highly decentralised, specialised groups handling particular items or tasks in the trade-flow process.

Category 2: Valuation Process

Why it matters

The valuation process is integral to a hedge fund’s ability to function, as it underpins the calculation of the fund’s net asset value (NAV), performance, trading position (daily p&l), risk management and among other things, ensures that investor subscriptions and redemptions are fair and appropriate. The valuation process is ultimately designed to ensure that the value assigned to each asset is as accurate as possible. This is particularly important where the assets are not traded on an exchange and hence there is no easily identifiable market value. Although it is clearly not possible to obtain an accurate market value for some assets with absolute certainty, given the very nature of such assets, there are a number of procedures and best practices that, if consistently applied, provide the Fund Manager and investors with confidence that the fund's positions are marked as accurately as possible.

Assessment areas

Valuation Process and Controls

Valuation Policies and Documentation

Valuation Oversight

10 See also: Trading and Business Operations, p.36, Best Practices for the Hedge Fund Industry, Report of the Asset Managers’ Committees to the President’s

Working Group on Financial markets, January 2009.




Our assessment

A key feature of a strong valuation process is the formal categorisation of positions into different degrees of liquidity requiring different types of outside sources for pricing11. The Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (FAS 157) which took effect in November 2007, categorises assets into a three level hierarchy illustrated as per the table below. As such, we look at the controls and processes in place within each category:

Table 5

Categorisation of assets as per FAS 157 Those that have observable market prices, such as a stock traded on the NYSE

Although these are generally easy-to-value, Moody’s will also ascertain whether price sources used are verified against secondary sources and subject to various price tests designed to ensure accuracy

Level 1 Assets

It may be obvious, but it is important to note that the valuation of exchange traded positions may be uncertain as a price published by an exchange may be different from the price at which the trade may be liquidated

Those that do not have an observable price but have observable inputs other than quoted prices, such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates and inputs that are derived principally from or can be corroborated by market data, e.g. an interest-rate swap where its components are observable data points like the price of a 10-year Treasury bond.

Level 2 Assets

The valuation is generally derived from pricing models or counterparty valuations, broker quotations, pricing specialists. Again Moody’s will seek to ensure that the prices used are verified against a reputable secondary source, which where possible, should include external broker quotations.

Assets where one or more inputs do not have observable values. This is the bucket that has sometimes been described as a “guesstimate”, because it is reliant on management best estimates. Prices can only be known upon sale/realisation of the asset.

“Unobservable” inputs/values are inputs that reflect the reporting entity’s own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort.

Level 3 Assets

If there are no available sources, there is no verification requirement if the assumptions are in line with those of market participants. However, we would still ensure whether the process is appropriate, sufficiently independent from the traders and consistently applied.

In addition to the above, Moody’s also assesses the checks in place to ensure the accuracy of pricing such as price testing, stale prices and price variance reports. Particular attention is paid to period end policies and procedures.

One of the key characteristics of a strong hedge fund valuation process12 is its independence from the trading/portfolio management function. If valuations are performed by the Fund Manager, then this would be typically done by a dedicated fund accounting group, and senior personnel separate from portfolio management would play a decisive role in the valuation process. For the majority of funds, independence is promoted by having an outside administrator value the portfolio. In order to determine the appropriateness and independence of the valuation process, Moody’s closely reviews the role that any external administrator plays in the NAV calculation process.

However, the presence of an administrator should not be construed as a solution to all the risks involved in the valuation process and our review is conducted from the perspective that it is the Fund Manager who has the ultimate responsibility and overall control of valuation. Moody’s ascertains whether the fund has additional steps in place towards ensuring that a high level of quality in the process is maintained, such as performing “shadow accounting” of the fund’s books; this provides redundancy in the process and where an administrator is used to increase independence, this ensures that all accounting entries are effectively checked.

11 For positions at all levels of liquidity, external pricing information should be obtained from sources demonstrated to be appropriate to the product type. The

same is true for any pricing models used in the valuation process. They should be from recognised or otherwise appropriate sources. 12 Moody’s assessment of the valuation process does not involve verification of values assigned to specific investments, although these may be used as

supporting evidence.




It is important to note that even in the presence of an administrator, for strategies consisting of complex, illiquid or hard-to-value positions, the Manager may have significant input into the valuation process. This may be considered appropriate, given the specific instruments and where the Manager is better placed to value such positions. However, even where the Manager is best-positioned and appropriately used to provide an estimate for certain securities, such an arrangement is not optimal from an operational quality perspective, and hence would need to be balanced by a number of controls. Our view is that a good, robust valuation process contains a review by the portfolio manager/trader, who, as the party most knowledgeable about the individual positions, would review each trade valuation and may suggest corrections to the back-office. In all such cases, Moody’s looks at the controls and checks which ensure sufficient independence from portfolio management and the transparency and consistency of the process.

Regardless of who has direct responsibility for calculation of reported NAV, we assess whether the process by which the valuation is obtained is documented and understood by everyone responsible for its implementation. Moody’s reviews the fund’s valuation policy, the methods utilised for valuing each type of asset it invests in, any documented appeal procedures, and any evidence in place covering adjustments suggested by the portfolio manager review to ensure that they are handled in a structured, consistent manner and are recorded and available for scrutiny along with explanations where necessary. Moody’s also examines any documented procedure for resolving disagreements on pricing

The level of valuation oversight, typically in the form of a Valuation Committee (and/or potentially a different control function), is another important element to consider when assessing the controls surrounding the valuation process. Moody’s looks at the role of the committee, its composition and where possible, any documented evidence of resolutions of specific valuation issues.

Lastly, Moody’s views positively the use of side pockets created for the purpose of holding illiquid investments which have no readily ascertainable market value up until realisation, only when necessary. These considerations are also discussed with the Manager during our review.

Category 3: Risk Management Framework

Why it matters

The Risk Management Framework is a key function in the investment decision-making process. Identifying and ensuring that the portfolio risk position is provided to the key decision makers is crucial to the Manager’s ability to meet the fund’s stated mandate. It is also important that suitable risk controls, which are best fitted to the fund’s strategy, are in place and that the process around risk management decisions is sufficient to ensure that risk considerations are given sufficient weight in the investment decision-making process.

Additionally, a hedge fund manager needs to know and understand the fund’s liquidity risk exposure and the fund needs sufficient liquid assets to meet its obligations as they fall due; these include investor redemptions, margin calls and means to pay creditors and expenses (funds also need some liquidity in order to be able to capitalise on potential investment opportunities). The management of a fund’s liquidity is key to a fund’s survival as the lack of liquidity can cause (and has in the past caused) the collapse of otherwise well-run sustainable funds13.

13 See Moody’s Special Report “Assigning Unsecured Credit Ratings to Hedge Funds”, Joel Levine, April 2007.

http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_102552




Assessment areas

Table 6

Investment Risk Management Liquidity Risk Management

Oversight Asset Liquidity

Tolerance and Identification Cash Management

Monitoring and Control Funding

Ex-Post Outcomes Analysis Collateral Management

Communication to Investors Counterparty Credit Risk Management

Link with liquidity risk management Redemption terms

Our assessment

Investment Risk Management As previously stated, the OQ rating does not aim to address the level of market risk or any other investment risk in the fund, nor the level of risk tolerance of the Fund Manager. What we look at is how well the processes, controls, people and systems have been set up to try to ensure that the fund meets its risk objectives and defined risk tolerances.

Our operational review includes an assessment of the fund’s internal risk reporting and control processes as for many hedge fund managers, balancing this requirement with its investment goals can be challenging. Additionally, these processes can vary substantially given a fund’s structure and strategy. Our approach and the importance placed on various elements of risk management thus considers the differences between funds and the relative merit of different structures of the control framework. It is important to note that the Moody’s OQ rating does not seek to address the appropriateness of the overall level of a fund’s market or investment risks, but rather addresses how well these risks are controlled within the fund’s self-prescribed risk limits.

Moody’s also establishes whether the fund has a designated risk manager or someone within the organisation with clear responsibility for risk management oversight and control. Risk quantification, monitoring and reporting is also analysed. The size of the team and level of expertise needed by these individuals would depend on the nature and complexity of the fund. In each case, Moody’s assesses whether the individual, or group, is sufficiently independent from portfolio management, has access to (and support from) senior management and whether the risk manager is sufficiently senior within the organisation to be able to carry out their functions effectively. The level of commitment of the relevant individuals to the risk control process as well as the Fund Manager’s overall risk governance approach is also assessed during the course of our review.

A key focus of our review is on the effectiveness of the risk management function in identifying, quantifying and monitoring the fund’s risk exposures, which include inter alia the risk tolerance definition and breadth of the approach, flags and limit structures used. Our discussions with the risk manager cover the fund’s risk metrics and how these best quantify the exposures in the fund. The use of stress-tests, where appropriate, is also examined.




Moody’s ascertains whether the fund has a written risk policy in place that outlines its procedures and approach and that is available to all relevant personnel. The HSFB provides a useful outline of items which may be included in such a document:

“…in most circumstances the Risk Policy Procedures might, amongst other things, include:

Guidelines for distribution of risk mandates among individual sub-portfolio managers and the setting and changing of risk limits;

Routines for risk reporting, exceptions reporting and escalation procedures;

Routines for reviewing and testing the risk measurement framework;

Guidelines for risk monitoring and risk measurement during stressed periods; and

Routines for communication the above information to all relevant persons within the hedge fund Manager in a clear and understandable manner14”

As is the case throughout the rating process, Moody’s review of risk management controls is tailored to the fund’s size, profile and to the type and complexity of investment strategies employed by the fund.

Figure 1

Investment Performance: Does it affect the OQ rating?

As stated previously, Moody’s OQ rating does not address investment performance and of course actual losses are not necessarily an indication of elevated operational risk. However, while there may be no direct relationship between investment performance and operational quality as underperformance can occur even when operational risk is low and quality of the management high, the impact of performance on a fund’s operational profile can be significant, particularly under stressed market conditions as highlighted by the recent market turmoil15. Some of the potential relationships between losses and increased operational risk include the following factors:

Poor performance may be an indication of process deficiencies in the fund’s operational framework which is generally organised around avoiding losses. For example, it may highlight a weakness in the risk monitoring function due to inappropriate quantification of risk;

Fund underperformance may lead to loss of investor confidence which in turn may lead to high redemption requests and hence to the imposition of gates or suspensions of redemptions;

If the underperformance is due to market stresses, the reliability of valuations may be affected due to pricing volatility and the inability to obtain independent marks because of market illiquidity;

Financial performance triggers in credit agreements may be activated which may result in increased liquidity risk and decreased flexibility constraining the Manager’s ability to perform its functions effectively; and

Poor performance may also lead to resource constraints leading to headcount reductions, either voluntary or involuntary or decreasing information technology spending, all of which may impact certain key operational functions.

Therefore, during the course of our OQ review, we focus on whether any material underperformance may reflect or ultimately lead to weaknesses in the fund’s operational framework.

14 Portfolio Risk – Governance Standards and Guidance [11], Hedge Fund Standards: Final Report, January 2008 Hedge Fund Working Group. 15 See Moody’s Special Report “Market Turmoil Increases Stress on Hedge Fund Operations”, January 2009.





Liquidity Risk Management

Moody’s looks at the different facets of liquidity risk in the fund and the process in place to capture, quantify and manage these risks, and also, where necessary, how prevalent these considerations are in the decision-making process.

The type and degree of control needed depends on a number of factors, including (amongst others) investment/asset liquidity, degree of leverage typically used or required by the strategy, the size and complexity of the fund and the stability of the capital base of the fund (including redemption terms, investor composition and financing arrangements).

Our assessment encompasses the Manager’s approach towards quantifying and managing liquidity risk and the management of any asset-liability mismatch. We also review the fund’s cash management process, and assess how cash requirements are monitored to ensure that the fund has enough liquidity to finance its obligations.

The way that the fund Manager diversifies and manages the fund’s sources of financing, such as prime broker, repo, lending and margining arrangements are taken into consideration, in the context of the fund’s needs, particularly where leverage is extensively used. Funds using extensive leverage from any source are assessed on their processes and controls around funding risk16. It is important that financing arrangements and the constraints that they impose on the fund are understood, are monitored actively and are considered as part of the investment decision-making process.

Moody’s reviews the collateral management/margin call process and key financing agreements. Particular attention is placed on material terms contained within the agreements such as termination events, cross-default and cross-collateralisation provisions as these terms may affect the availability of funding under certain conditions17.

The fund’s counterparty credit risk management is also analysed with particular attention paid to diversification of counterparties where appropriate (including prime brokers), ongoing monitoring of counterparties' creditworthiness and counterparty exposure management.

Moody’s focuses on the fund’s redemption terms in order to determine the presence of gates, suspension provisions and lock-up periods and how well these correspond to the fund’s strategy, liquidity of the underlying assets, other means of financing and their impact on the fund’s liquidity profile.

Category 4: Corporate Functions

Why they matter

The Corporate Functions are collectively the remaining primary internal functions that a hedge fund manager typically performs to support the investment activities of the fund (and the aforementioned functions) as part of the course of business. These include compliance and legal, systems and business continuity, human resources and finance and taxation. These functions are important to the fund’s operational infrastructure as they affect the smooth running and sustainability of the fund Manager’s operating environment, as well as underpinning a number of the investment-related functions.

16 See also, Liquidity Risk, page 26, Best Practices for the Hedge Fund Industry, Report of the Asset Managers’ Committees to the President’s Working Group

on Financial markets, January 15, 2009 17 For instance, funds that use securities as collateral for borrowing should also keep track of its exposure to increases in collateral haircuts from their lenders.




Assessment areas

Table 7

(a) Compliance and Legal

(b) Systems and Business Continuity (c) Human Resources

(d) Finance and Taxation

Complexity of Compliance Regime

IT & Systems Culture Hiring Process Internal Accounting

Staffing Staffing Staffing Taxation

Compliance and Legal Documentation

Security, Access & Permissions

Training

Compliance Monitoring and Reporting

Business Continuity & Disaster Recovery

Compensation

Regulatory Compliance Scalability & Growth Planning

Reporting

Anti-Money Laundering Procedures

Our assessment

(a) Compliance and Legal The objective of Moody’s OQ rating review is to make a general assessment of operational aspects of the Manager’s overall compliance framework and not to address all the elements of compliance risk.

Some important aspects of compliance that are considered are the complexity of the fund’s and Manager’s compliance regime, compliance policies and manual (which typically include inter alia anti-money laundering procedures, code of ethics, personal account dealing and market abuse checks), procedures and associated documentation that substantiate the adherence to these policies and the firm’s demonstrated commitment to its compliance policies. Formulation of our opinion may therefore include an examination of management reports, compliance checklists, exception reports, internal audits and other pertinent documents. Moody’s also reviews the controls that the Manager has in place to ensure that the fund complies with all the relevant regulatory authorities and legislation. We further consider the experience and qualifications of the firm’s Chief Compliance Officer, in reference to the fund’s size and complexity.

(b) Systems and Business Continuity Systems are key to ensuring that the operational infrastructure can continue to operate in the event of a significant business or environmental or possible security disruption. It is important that suitable information technology and systems controls best fitted to the fund’s strategy are in place.

In our assessment we look at information technology security, access and permissions and how this is managed from a control perspective. Business continuity and disaster recovery are also considered to be important elements to ensure that the organisation is able to cope in any event without suffering any undue stress. As such the business continuity plan, the role of information technology and its perceived importance within the organisation, staffing, scalability and growth planning are also be taken into consideration.

(c) Human Resources The majority of value added by a fund is derived directly from its human capital (i.e. its employees). Our review of the various human resources functions of the Fund Manager entails hiring practices, staffing, training, compensation and reporting, all in the context of the organisation’s size and complexity.

Large complex organisations would likely require a separate function and structured approach to managing these processes, while smaller, less complex companies could perform many of these functions in more flexible ways. As such, Moody’s analyses how these functions are performed, that they are appropriate to the organisation and that key criteria such as staff background checks are given sufficient attention.




(d) Finance and Taxation This section addresses the needs at the Manager level, not at the fund level, with regards to internal accounting controls and financing activities. These include: budgeting, financing, forecasting, expense approvals/allocations (which also directly affect the fund if certain expenses are allocated to the fund) and fee calculations. Moody’s assesses whether the Manager has sufficient access to taxation expertise, either through an in-house professional or via a reputable third-party specialist, to meet its tax reporting requirements and for tax efficiency purposes.

The finance/accounting function is paramount to ensuring that the investment manager remains viable and profitable and that the day-to-day business of the firm operates as smoothly as possible; as such, the portfolio managers/traders are more likely to be able to focus on the “value-added” services that they provide to the fund. This in turn affects the long term viability of the fund and the operational stability of the Manager. Tax efficiency and expertise are also important to the running of the firm as they affect the fund's overall results. We also review the firm’s processes used to ensure that the fund and investors do not breach any requirements, such as accurately reporting tax filings, which could result in fines or suspensions.

Category 5: Service Providers

Why they matter

The use of third-party (external) service providers for certain functions provides an additional layer of security to investors by increasing the level of external (independent) scrutiny over the fund’s activities.

Our assessment

Moody’s considers that the three main types of service providers to hedge funds are Administrators, Prime Brokers and Auditors, each of which can provide the fund or Manager with a variety of different services and service levels. Chart 1, on page 9, depicts a typical hedge fund structure including its primary service providers.

As such, our review focuses on these three service providers, particularly their profile and reputation. Our considerations include characteristics such as: size of the organization, track record, experience, market standing and independence among others items.

The more detailed review of the services provided, particularly in the case of the administrator, including our review of the processes and controls related to the fund, are addressed in the aforementioned categories, primarily in Operations and Valuations.

Table 8

Typical Services Provided by Third Party Service Providers to Hedge Funds Administrators Trade Support (trade reconciliation, confirmations)

Fund Accounting (maintenance of accounting books and records, security pricing, determination of monthly NAV)

Fund Administration/Transfer Agency (maintenance of shareholder registers, processing subscriptions, redemptions, investor reporting and corporate secretarial services)

Prime Brokers Custody, securities lending, executions, leverage facilities, margin facilities, cash management, clearing, capital introduction, business consulting and research among others

Auditors Financial statement audit, auditing opinion Companies affiliated to the auditors may also provide certain tax and accounting services

The fund and Manager may also use a variety of other service providers, such as external counsels, marketing companies, research houses, consultants, etc. Their profile and reputation are also considered as part of the rating.




Operational Quality Rating Process

Initial Process

The first step in the rating process is a specific request from the Fund Manager or other related party to rate the fund.

Chart 3

Moody’s OQ Rating Process

Document Review

After a rating analyst and team have been assigned, a request for documentation and general information is made to the management of the hedge fund. The document request includes items such as the investment management agreement, offering memorandum/prospectus, subscription/redemption documents, internal control procedures, administration agreement, previous audit reports, organisational charts, systems flow charts and the compliance manual. At the Manager’s request, more sensitive documents may be reviewed at the Manager’s premises (as part of the on-site review, described below). Under the supervision of the lead analyst, the Moody’s rating team evaluates the requested documents and may discuss them with the appropriate personnel at the fund during the on-site review.

On-Site Review

Once the documentation review is largely complete, the lead analyst and rating team conduct the on-site review at the Manager’s premises. Meetings between key fund personnel and the rating team are scheduled. The rating team generally focuses on discussions with the senior individuals responsible for specific areas that form part of the OQ assessment, such as the Risk Officer for the Risk Management Framework category, Chief Compliance Officer regarding the compliance function.

App

rox.

6-8

Wee

ks

Discussions with the fund’s administrator, prime brokers and auditor

Rating request

Document review

Onsitereview

3rd Party review

Rating decision

Legal documentation Internal policies and procedures

Perform initial fund screening Meetings with key fund personnel

Analyst recommendation and Scorecard presented to rating committeeFinal rating decision made by committee

Rating assignment

Rating and report communicated to clientRating made public (at fund’s option)

Rating Process Description

Discussions with the fund’s administrator, prime brokers and auditor

Rating request

Document review

Document review

OnsitereviewOnsitereview

3rd Party review

3rd Party review

Rating decisionRating

decision

Legal documentation Internal policies and procedures

Perform initial fund screening Meetings with key fund personnel

Analyst recommendation and Scorecard presented to rating committeeFinal rating decision made by committee

Rating assignment

Rating assignment

Rating and report communicated to clientRating made public (at fund’s option)

Rating Process Description




Moody’s also conducts meetings with the individuals responsible for the day-to-day functions in certain areas, such as the fund accountants responsible for the calculation of the fund’s Net Asset Values or operations managers which deal with trading requirement. Time is also typically allocated for follow-up questions and feedback, and to confirm the details of any findings.

The rating team typically has a “tour” of the Manager’s premises, which may be accompanied by discussion regarding any business continuity and disaster recovery plans and in certain cases also demonstrations of key software used to manage the fund’s operations.

Third-Party Review

During the course of the review, the rating team also asks the Manager to allow direct contact with third-party service providers. The contact may be more extensive when an administrator, prime broker or auditor is previously unknown to Moody’s.

For administrators, the purpose of these communications is to ascertain their understanding of their role in the fund’s operations, especially as it pertains to the fund’s valuation process. Where deemed necessary, Moody’s also conducts on-site meetings at the administrator’s premises.

Moody’s interaction with the prime brokers primarily focuses on the confirmation of process descriptions provided by the administrator and Fund Manager and confirmation of the continuing relationship between the fund and the prime brokers. If a variety of services is provided by the prime brokers to the fund, and where those services are relevant to the OQ rating, Moody’s may then request more information from the prime brokers. Typically where the fund has several prime broker relationships, Moody’s may only select a sample as part of the assessment.

For administrators and prime brokers, weight is given to evidence of independent review such as SAS 70 reports18.

Rating Decision

After the review process is completed, the lead analyst, in conjunction with the rating team, prepares the rating scorecard, a rating recommendation and a summary memo to be circulated to the members of a rating committee. All assignments and changes to OQ ratings result from a rating committee decision after consideration of the analyst's rating recommendation.

Rating Assignment

After the fund’s rating is determined by the rating committee, a rating report and press release are communicated to the Fund Manager. Should the fund elect to make the rating public, it will be subsequently be posted on the Alternative Investments area of Moody’s website, Moodys.com19, along with a Rating Report describing the rationale for the rating.

Ongoing Monitoring

OQ ratings are monitored on an ongoing basis.

18 Statement on Auditing Standards (SAS) 70 is an international auditing standard developed by the AICPA (American Institute of Certified Public Accountants)

that was published in April 1992. It relates to the evaluation of a Service Organization’s implementation and disclosures of its internal controls. Only Certified Public Accounting Firms that comply with professional standards established by The American Institute of Certified Public Accountants can issue the reports.

19 The Alternative Investments area of the Moody’s website is a subcategory of “Managed Funds”, which is listed on Moody’s homepage.

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Moody’s Related Research

Special Reports Moody’s Approach to Evaluating and Assigning Operations Quality Ratings to Hedge Funds, October 2006

(SF77845)

Assigning Unsecured Credit Ratings to Hedge Funds, April 2007 (102552)

Market Turmoil Increases Stress on Hedge Fund Operations, January 2009 (113953)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

Website Access

On the home page of Moodys.com, choose the Managed Funds section to view all ratings and associated research on Alternative Investments.

Operational Quality reports may only be accessed by “accredited investors” in accordance with US rules. Non-US individuals or entities are requested to also complete these online forms in order to gain access to the reports. To view these, click on the “Operations Report” link on the right-hand side of the web page. You will be prompted to submit an accreditation form in order to verify your accredited investor status. Once submitted, you will receive further instructions on how to access OQ reports and other alternative investment research.

www.moodys.com/...managed funds/..alternative investments

http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBS_SF77845

http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBS_SF77845



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© Copyright 2009, Moody’s Investors Service, Inc., and/or its licensors and affiliates (together, "MOODY'S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Report Number: 116772

Authors Senior Production Associate Odi Lahav Joanne Job

Wing Chan Ida Chan

managed funds oq methodology

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