Morningstar opens curtain on returns of largest hedge funds

Morningstar is to reveal quarterly returns of about three quarters of the world’s largest hedge funds – dubbed the ‘Billion-dollar Club’ – but only to institutional clients.

The data provider will draw on regular public filings and financial statements from funds of funds investing in hedge funds to calculate the performance, including from the world’s largest portfolios.

Institutional clients can already subscribe to a licensed data feed for the returns information, or receive it through the firm’s Morningstar Direct institutional research product in coming months.

Either way, they will enjoy insight into how well, or poorly, the $2trn industry is doing.

This will make it harder for all funds, including larger ones, to conceal their performance from wider gaze.

Pertrac estimates only 280 funds, of 8,155 in the industry, hold $1bn or more. But the large funds’ total assets represent 54% of all money in the industry.

Of this group, only 40 funds manage over $5bn, but their combined assets are 24% of the industry’s.

Morningstar has begun its returns project on about 1700 portfolios, calculating returns using multiple fund of fund investors, much as a mobile phone’s location can be pinpointed using numerous transmitter masts as reference points.

It will publish lagging returns for both live and dead funds, after analyzing regulatory filings of holdings by investors registered under the US Advisors Act.

It is now completing analysis of first quarter filings, examining values of individual funds at the period’s opening and its close, then identifying the median to publish as the estimated return.

Morningstar is also listing each individual performance estimate for each fund – as performance estimates may vary between investors due to variables such as fees – and the names of the registered hedge fund investors whose documents are used.

Where cashflows into or out of investors during the quarter might cloud the clarity of fund performance, Morningstar will not use data from that investor.

The project will draw back the curtain on the increasingly exposed $2trn industry.

During the crisis, letters to investors, and collated data from European private banks circulated widely with up-to-date figures for some of the largest managers including Paulson & Co, Brevan Howard, and Caxton Associates.

The emergence of ever more Ucits clones of offshore funds, and of regulated US hedge fund-like mutual funds made ascertaining performance easier.

Some managers are also willing to divulge performance, as long as it is not ultimately couched in marketing terms. But some funds remain a closed book.

John Rekenthaler, vice president of research for Morningstar, said: “The vast majority of hedge fund assets are concentrated in a small number of very large funds, and it’s precisely these funds that are the least likely to report performance.

“In contrast to the self-reported composite returns provided to hedge fund databases, or the audited performance numbers in registered funds’ annual reports, estimated performance reflects the actual experience of specific investors.

“With estimated returns, we not only get an overall picture of performance, but we can see how different investors fared with their investments in the same hedge fund.”

Morningstar is making the output available via its institutional data product in the coming months.

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