Morningstar's Alternative Reality

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, it 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. McKinsey & Co. also predicts that retail alternative mutual funds will become part of the mainstream market in the years to come. According to the consulting shop, alternatives, which currently account for 8% of total US retail fund assets, will make up some 13% of total US retail fund assets in 2015.

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, told Money Management Executive that her firm always intended to rate alternative funds but wanted to assess their pillars slightly differently than traditional managers (see Money Management Executive, "Behind the Pillars Of a Morningstar Rating" June 18, 2012).

For example: Papagiannis said Morningstar will scrutinize the manager processes closely in terms of transparency and repetition but will be a bit more lax on the managers' parents because not all firms are backed by giant parents.

But Morningstar is not stopping with alternative funds.

Going forward, the firm will begin rating alternative exchange-traded funds.

"We have already covered four alternative ETFs," said Papagiannis.

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