Perhaps it was only a matter of time before Morningstar decided to put its stamp of approval, and disapproval, on alternative mutual funds.
And by all measures, the fund research firm should.
Assets held in alternative mutual funds have increased 128% since October 2008, reaching $99 billion as of March 2012, according to the Chicago-based research shop. Additional research by Cerulli Associates found that asset managers expect alternative mutual funds will comprise more than 15% of all mutual funds in 10 years.
Last month, Morningstar introduced the Morningstar Analyst Rating and Global Fund Reports for approximately 40 alternative U.S. mutual funds. These are funds which represent about 75% of the alternative fund universe by assets. Over the next year, the company plans to increase its alternatives coverage to approximately 100 funds.
Initially, Morningstar analysts assigned a Gold rating to the TFS Market Neutral (TFSMX) fund, a Silver rating to nine funds, a Bronze rating to seven funds, a Neutral rating to 17 funds, and a Negative rating to six alternative funds, including the Princeton Futures Strategy (PFFAX), Guggenheim Managed Futures (RYMTX), Aberdeen Equity Long-Short (MLSCX), Hatteras Alpha Hedged Strategies (ALPHX), Goldman Sachs Absolute Return (GARTX) and the Hussman Strategic Growth (HSGFX).
Nadia Papagiannis, director of Morningstar's alternative fund research, said that her firm always intended to rate alternative funds but wanted to assess their pillars slightly differently than traditional managers (see "Behind the Pillars Of a Morningstar Rating," June 18, 2012).
For example: In traditional funds such as those focusing on large-cap strategies, Papagiannis said her firm expects the manager to have more than $1 million of his or her own net worth in that fund.
"But in the alternative space, some funds like market neutral [funds] are not exactly core holdings so it's not as much of a requirement as in traditional funds but we do look at managers with more than $1 million invested even more favorably," she said.
In fact, the TFS Market Neutral fund got its Gold rating partly because "besides keeping transaction costs as low as possible, management has demonstrated excellent stewardship in other respects," according to Papagiannis. "All of the six portfolio managers invest in the fund, and three of the six have invested more than $1 million," she wrote.
Hung Tran is the editor of Money Management Executive, a SourceMedia publication.
Register or login for access to this item and much more
All Employee Benefit News becomes archived within a week of it being published
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access