What does an AHI Rating mean?
As the considerations of an investor in Hedge Funds, Funds of Hedge Funds, and Long-only funds are typically different – with significant differences between sub-strategies, our approach necessarily varies from sector to sector.

At AHI, we only give “A”, “AA” and “AAA” ratings: those that we consider to be worth investing in. If a fund doesn't have a rating it may mean that we have not assessed the fund, or that we do not consider it to be worth investing in, when compared with alternatives.

To achieve a "A" Rating is very hard, requiring good risk-adjusted performance and sound operational structure, as well as investment processes which make sense. An "AA" Rating is much harder still to achieve, and requires exceptional risk-adjusted performance, and even stronger operational setup.

The "AAA" AHI Rating is the hardest to achieve. It requires an institutional level of operational backup or other highly significant features which keep investors money safe. There is a very high benchmark for risk adjusted performance.
But the analytics that contribute to the final score may be of more interest. We assign the rating based on a qualitative assessment of a number of considerations (see table below) in the context of the fund’s investment objective and potential substitutes. We believe that the system must be viewed as a whole, and that for example, investment process is (or should be) too closely aligned with risk management to be viewed in isolation. However, for ease of presentation, we do categorise areas.

The aim of the annual assessment and the annual Allenbridge rating is to produce a measure of the outlook for returns, whilst avoiding the risk of serious loss.

Rating  Considerations

Quantitative Performance Analysis	Operational Risk
Comparison with indices and peers	Firm & personnel background
Quantitative tools	Systems & controls
Investment Process	Continuity planning
Manager background	Transparency
Investment philosophy & strategy	Compliance
Idea generation	Structural Risk
Due diligence approach	Manager structure
Money management	Fund structure
Execution	External controls
Market risk management	Alignment of interests
Sustainability of strategy & “edge”	Fee structure

Quantitative Performance Analysis
Past performance is not a true guide to future performance. Yet risk-adjusted performance is often the best or only guide we have.  We aim for our scoring for quantitative performance to represent deciles in the fund’s universe.  However this is very difficult to achieve in a scientific manner. Indices tend to overstate the investible universe. This occurs because of a combination of inclusion of funds which are closed to new investment and survivorship bias.  And the data for peers available for comparison is often limited. If we were to systematise performance measurement fully, it would give an impression of robustness and reliability that could be misleading. So we use complex quantitative tools to aid us in the art of performance measurement.

We use a number of different quantitative measures because we have not yet come across a single metric which captures all the characteristics of a return profile. And since investment objectives vary, so do the tools needed to assess success. We tend to favour measures which capture the higher moments such as skew and kurtosis, and reference the time series. We tend to favour managers whose performance is improving.

Quantitative assessment vs. Indices
The index comparison is particularly useful for context. We use equity indices (eg. S&P 500, FTSE All-share), bond indices (eg. Lehman Global composite index), hedge fund indices (eg. HFRI)  and hedge fund sub-sector indices (eg. CSFBT sub indices), relevant to the fund in question. As such, we rate funds in the context of a sub index, as we believe top down allocations are for the ultimate investor to decide, and our job is to find funds that can form part of a diversified portfolio.

Quantitative assessment vs. Peers
The peer analysis against a range of fund substitutes is more interesting. We aim to choose peers who have similar objectives in a similar field, and represent a range of choices for investment. Therefore, we do not include funds that are closed. Where possible, we aim for the range to average a little below the (non-investible) sub-index.