S & P Finds Another Use For Ratings

by Jeremy Hetherington-Gore, Investors Offshore, London

28 March 2002

In a remarkable development, Standard & Poor's is understood to be planning to launch an investable hedge fund index, that's to say, it will launch a fund based on its own index. The only possible reaction to this news, if true, is: Quis custodies custodiet? Meaning, who will guard the guardians?

S&P is understood to be putting together an index of 21 funds, asking each of them for an allocation of US$100m. The attraction for the hedge funds, which are being approached now, is that the index would provide them with long-term investment capital. The menace is that S&P's managers are scarcely going to be unbiassed when it comes to rating a fund which refused to join in.

It is all reminiscent of a famous birthday party held in Moscow by the post-Soviet telecommunications ministry, to which Western invitees, all of them prospective license holders, were invited to bring 'presents' for the birthday Minister, it being well understood that the presents should have at least four noughts on the end and come in brown envelopes.

Bear Stearns and Deutsche Bank are understood to have been named prime brokers for the fund. PlusFunds, which was to have been a platform to distribute hedge funds online, but whose business model has recently changed, will be used to regularly update the index on its website.

"PlusFunds believes that the hedge fund space is in need of some kind of investable hedge fund index," said a PlusFunds spokesman, who noted that the industry is growing rapidly but remains fairly secretive. The spokesman declined comment on details of an upcoming product, and a spokeswoman for S&P also declined comment on the hedge fund index product.

Credit Suisse First Boston and Tremont developed one of the first hedge fund indices, and Van's product is also respected. More recently Zurich Financial Services has come out with its own product and Morgan Stanley Capital International is also understood to be working on its own index. But this is the first time that an index provider has offered investments based on its own index, as opposed to just licensing its index to a third-party provider for use as a benchmark.

Time to change your rating agency, if Enron hasn't put you off all of them.

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