Hedge Funds Set To Earn Gold Stars

Feb 14 2008 | 2:14pm ET

Morningstar is bringing its famous star ratings to the hedge fund industry. The Chicago investment research outfit today unveiled plans to begin rating the funds in its database, giving hedge fund investors the same five-star system that has become the gold standard of mutual fund ratings.

Hedge funds will be divided into 17 categories covering equity, debt, event-driven, arbitrage and global strategies, as well as multi-strategy funds. Funds of hedge funds will not be rated, as Morningstar has “not developed a subcategorization system to further define funds of funds.”

Morningstar said it expects about 1,800 of the 4,400 single-manager funds in its database will be rated. Funds must have a 38-month continuous track record to qualify for rating, and Morningstar will not rate funds in categories that have fewer than five eligible candidates.

Alongside the new ratings is a new group of indices based on Morningstar’s database. The Morningstar 1000 Hedge Fund Index will include the top 90% of eligible assets in the database. In addition the firm will publish subindices for each of its categories, as well as a fund of funds index.

“We believe the Morningstar Rating for hedge funds is the best starting point for judging a fund's past performance,” John Rekenthaler, vice president of research, said. “We want to make researching hedge funds a more transparent process, and our new ratings and indexes will allow qualified investors, advisors, and institutions to better evaluate and compare hedge funds to their peers.”

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