Independent investment research provider Morningstar last week launched the Morningstar Rating for hedge funds, the Morningstar 1000 Hedge Fund Index and 17 indexes based on the Morningstar Hedge Fund Categories.
The new rating system for hedge funds is similar to the Morningstar Rating for mutual funds, according to the company. It uses a scale of one-to-five stars so similar numbers of hedge funds receive one and five stars. Morningstar categorizes the hedge funds into one of 17 Morningstar Categories, such as "convertible arbitrage" or "emerging market equity," according to a series of quantitative and qualitative measures. Morningstar then ranks and rates the hedge funds against peers in the Morningstar Categories based on risk-adjusted return.
Morningstar's database contains approximately 7,700 direct hedge funds and funds of hedge funds. There are 3,300 funds of hedge funds in the database.
The new Hedge Fund Index contains the top 90 percent of eligible assets in Morningstar's hedge fund database. The index is updated daily for the previous month-end, rebalanced monthly and reconstituted semi-annually. Morningstar also launched the 17 category indexes based on the company's strategy-specific classification system for hedge funds.
This is certainly a very logical next move for Morningstar. There is undoubtedly a strong need for such content; and the financial ratings giant already has a great model (the Morningstar Rating for mutual funds) to follow.
It's usually a good idea to take a winning formula and run with it. That's just what Morningstar did with this particular offering. Of course, it's necessary to do your research first in order to confirm there is enough customer interest to make a new offering viable. If Morningstar can identify other ways in which to build on this model, it probably will.