The downgrade comes after a period of review and follows hefty losses for the fund during market turmoil in March. It also comes a year after Morningstar raised concerns about the fund's holdings in illiquid debt.

"The fund's bold macro bets have led to extreme losses in the market turbulence of March 2020 and were not adequately reined in by formal risk controls," Morningstar said in a note.

Despite gains of 19.7% in 2017, 28.4% in 2018 and 39.6% in 2019, the Allegro fund has had a tough 2020. Morningstar said the fund had suffered three "extreme" daily losses, including 25.4% in a single day, over six trading days in March.

A spokesman for H2O said the firm strongly disagreed with the decision taken by Morningstar, citing the firm's "dynamic" risk management and active management of trade sizing in light of the market volatility.

"A risk management framework that allows for greater volatility also helps to deliver superior returns while lower volatility typically means lower returns. Risks must also be assessed with regards to the investment horizon of each fund which, in the case of H2O Allegro, is three years," he added.

Morningstar also criticised H2O's French parent company, Natixis.

"Risk management is not alone in lacking authority. The same can be said for H2O?s majority owner, Natixis, which continues to struggle in providing a true counterbalance to the risk-hungry portfolio managers," the analysts said.

Natixis declined to comment when contacted by Reuters.

By Simon Jessop