Guidance urges dealers to better align internal ratings with historical fund performance
AIMA and the CAIA Association have unveiled a revised set of risk rating guidelines aimed at improving how Canadian investment dealers assess alternative funds.
The updated framework is designed to help firms better match their internal risk classifications with the historical risk-adjusted performance of funds tracked within relevant indices. By doing so, the associations say dealers can make more informed assessments of alternative strategies across different market environments.
Now in its seventh iteration, the guidance continues to provide a benchmark for evaluating hedge fund and private credit strategies, where category recommendations have remained broadly stable over time. Additional private market asset classes, first incorporated in last year’s edition, are included again, marking the second year these segments have been covered.
The guideline plays a significant role in Canada’s distribution landscape, where dealers are required to assign internal risk ratings to all investment funds. In many cases, alternative vehicles offered through public channels without a prospectus, as well as private funds, are routinely labelled as high risk. This classification can restrict how widely retail investors can access such products and limit the size of potential allocations.
AIMA and CAIA argue that a more nuanced approach is needed. By aligning internal rating systems with historical risk-adjusted data drawn from indices, they believe investors could gain fairer access to strategies that offer diversification benefits, lower correlations with traditional assets, and the potential to reduce portfolio risk across varying market conditions.
“AIMA and CAIA believe these risk rating guidelines provide valuable context for dealers and allocators in assigning internal risk ratings and evaluating alternative strategies,” commented Lauren Cooper, director, head of Canada, AIMA. “Alternatives play an important role in balanced portfolios, enhancing diversification, resilience, and return potential without necessarily increasing overall risk exposure. As their role continues to grow, aligning internal risk ratings to historical risk-adjusted performance within indices and to the specific strategy is essential to supporting fair investor access.”
Steven Novakovic, Managing Director, Educational Programs, CAIA Association, added: "CAIA Association is once again delighted to partner with AIMA in producing well-constructed Risk Rating Guidelines. These guidelines are a valuable resource for any allocator and represent the prudence and care fostered by AIMA and CAIA when it comes to investing in alternatives.”
The associations say the newly updated guidelines are available for dealers and allocators seeking a more comprehensive reference point when evaluating alternative investment risks.
