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Morningstar reports to shed light on hedge funds


Date: Monday, February 27, 2006
Author: Svea Herbst-Bayliss- Reuters.com

Morningstar Inc. (MORN.OQ: Quote, Profile, Research), one of America's best-known mutual fund ranking firms, is ready to publish reports on hedge funds and shed new light on an often secretive but successful industry, company executives said.

The Chicago-based company moved into the $1.1 trillion hedge fund industry in 2005 with a database that tracks 2,600 funds' telephone numbers, addresses, and performance data.

This year Morningstar plans to go a step further and become the first independent research firm to publish reports designed to help investors select among the world's estimated 8,500 funds in an industry where managers long preferred to stay quiet on how they make money and what they hold.

"While the mania surrounding hedge funds may not always be as strong as it is now, hedge funds are here to stay and research on funds has a reason to be here," Morningstar Managing Director Don Phillips said in an interview.

Several recently hired analysts have already completed Morningstar's first batch of reviews after having quizzed large and small hedge funds on how managers make money, Phillips and Ryan Tagal, Morningstar's director of hedge funds said.

The reports will give investors a more qualitative assessment of the managers while the database paints a quantitative picture, Tagal explained, adding, "Our reports are not commissioned by managers. We write them on our dime."

Morningstar is still working out how to deliver the hedge fund reviews, which will likely resemble hundreds of reports being written every year by Morningstar's roughly two dozen analysts who track the $8.8 trillion mutual fund industry.

"The actual time of publication has yet to be determined, but it will be this year," Tagal said about the new hedge fund reports. At the same time, Morningstar, best known for its star rankings on mutual funds, is also looking at ways of rating hedge funds, the two executives said.

Hedge fund investors and analysts said trying to rate hedge funds may prove difficult. Even the new U.S. government rule on hedge funds does not force managers to tell anyone how the funds operate or what what they hold.

But Morningstar is venturing into what many analysts call a profitable and popular industry where assets have doubled in the last five years as investors ranging from pension funds to wealthy individuals seek better returns.

Hedge funds have helped many pension funds like the Massachusetts state pension fund and endowments like Harvard University's beef up returns in recent years.

However, after years of finding managers by trading tips about top managers at parties and on golf courses, investors are finding that the hedge fund industry has grown beyond its "word of mouth" roots. At the same time managers said they now need to find capital in a more formal fashion.

Morningstar is competing for hedge funds' attention with companies like Lipper Inc., a unit of Reuters, and Hedge Fund Research that also track thousands of hedge funds but do not yet offer research reports.

"It is a competitive industry and as getting assets becomes tougher, managers don't want to be left out and call us to be included in the database," Phillips explained.

Since the summer, Morningstar added roughly 1,000 new hedge funds to its database and plans to keep signing new ones up, Tagal said without giving a time or target on how many funds may be added.

The database is already available to institutional investors and Morningstar plans to make it available to financial advisers as well.

While hedge funds were once reserved for big pension funds and very wealthy investors they are now being included more readily in other portfolios, financial advisors said.