Fitch Ratings has published a guide to the qualitative analysis of absolute return (AR) funds. The report focuses on the key considerations when assigning Fund Quality Ratings (FQR) to regulated absolute return funds. A robust analytical framework is particularly important for this less seasoned, more sophisticated fund sector.
‘Whether returns are alpha- or beta-driven, the management of an absolute return fund requires greater skill and a different risk management framework than the management of a relative return (i.e., benchmarked) fund,’ says Matthew Arrive (pictured), Senior Director in Fitch’s Fund and Asset Manager Rating team. ‘As absolute return fund management requires a bespoke approach, so should the fund review process.’
The report elaborates on how a qualitative assessment of an AR fund should specifically highlight the diversification and independence of genuine AR sources of performance and a dynamic, risk-based approach to portfolio construction. Furthermore, the report highlights how a sound decision making process should rely on a multi-expert team while emphasising individual accountability.
Finally, the supporting technology, in particular risk analytics, must fully match business requirements in the areas of portfolio construction, real time risk and P/L monitoring while ensuring efficiency and flexibility.
