'Alternatives high risk rating is unjust'

Associations propose new guidelines which give investors a ‘fair opportunity’ to access strategies

'Alternatives high risk rating is unjust'

Two leading associations have proposed a new system of risk ratings because they believe the current method unfairly deems retail alternative products as high risk.

The Alternative Investment Management Association and Chartered Alternative Investment Analyst Association jointly published guidelines in response to new regulations and consistent feedback from AIMA member firms.

Claire Van-Wyk-Allan, director and head of AIMA Canada, said: “To improve access to alternative investments for retail investors, AIMA Canada and the CAIA Association are pleased to propose our risk rating system that more accurately reflects the lower risk that these products provide to a portfolio.

“Canadian investors deserve a fair opportunity to access the talent and strategies managed at boutique and established investment firms without requiring an unjustly high-risk investing profile to do so.”

The final amendments to regulation NI 81-102 will make alternative investment funds available to retail investors. It is predicted that, with increased volatility and the business cycle potentially heading towards its end game, the Canadian alternative mutual fund market could grow to $20 billion in the next five years.

The Associations believe that existing risk-rating methods that label alternatives as high risk will limit the number of investors who can access these products, with dealer firms often overlaying additional risk-rating policies on standards outlined by the CSA.

To reduce portfolio risk and give retail investors access to alternative products, the Associations advocate that:

  1. Additional Risk Rating systems at the investment dealer should be re-assessed for all alternative fund strategies, including the new alternative mutual funds, to reflect true risk;
  2. Any risk rating scale at the investment dealer should include five categories of risk, rather than only three, consistent with prospectus risk ratings;
  3. Fund categories should be separated for alternative fund strategies and alternative mutual funds, and should then be expanded to include sub-categories so products can be evaluated adequately and individually against their peers.

The Associations’ proposed new risk rating system is based on the median trailing standard deviation of funds within indices (see table below) and stipulates that no alternative mutual funds or alternative strategies will be rated in the “low risk” category.

Belle Kaura, chair at AIMA Canada, said that alternatives play a key role in a balanced portfolio, offering diversification, risk reduction and non-correlated returns to investors.

She added: “It is imperative, especially late in the economic cycle amid a rising-rate environment, that Canadian investors are not denied access to the benefits of alternative strategies by simplistic and unfair methods that rate all alternative investments as high risk.

“AIMA Canada and CAIA’s Risk Rating Guideline seeks to eliminate barriers to distribution by more fairly aligning risk ratings with true risk based on the specific type of alternative strategy and qualitative due diligence on the manager and product.

“We advocate a review of risk rating systems by investment dealers for all alternative strategies and the use of a five-tier risk scale (rather than only three) for greater flexibility, improved accuracy and consistency with prospectus risk ratings.”


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