Bermuda-based Max Capital Group Ltd. has seen its ratings outlook upgraded to positive from stable by AM Best, partly because of its efforts to reduce the level of risk in its investment portfolio.

Max announced earlier this month that it intended to cut the proportion of its investments in hedge funds from 20 percent to 15 percent by the end of this year.

Best affirmed the financial strength rating of Max Bermuda Ltd. and its affiliated companies at A- (excellent) and their issuer credit rating at "a-".

The move to a positive outlook, which suggests the possibility of an upgrade in the near future, is based on Max's "planned reduction of its riskier alternative investment portfolio allocation, evolving operating platform and increasing global presence". Best said. "Max's strategies should position it well for the current market hardening, particularly in property lines."

Although Max's investment portfolio primarily consists of traditional fixed maturities, the company also maintains a substantial level of alternative investments, which consist of highly diversified and closely managed hedge funds, Best said.

"The performance of the alternative investment portfolio has been affected by current market turmoil and will result in negative returns for the year," the ratings agency added.

"Historically, Max's management team has systematically reduced the company's level of exposure to alternative investments and announced further reductions to approximately 15 percent of total invested assets by year end.

"AM Best includes an elevated risk charge for the alternative investment portfolio in Max's risk-based capital model. Max is expected to maintain an excellent risk-based capitalisation level despite the combination of an elevated risk charge and mark-to-market investment adjustments."