Morningstar Advisor - Spring 2007 - (Page 23)

Frontier Including Hedge Funds Annual Return Traditional Frontier 20% Morningstar Hedge Fund Universe (Equal Weighted) 15 Large-Cap Stocks Small-Cap Stocks An efficient frontier of portfolios including hedge funds can offer better risk/return characteristics than one composed of only traditional assets. Below is a glance at Morningstar’s hedge fund categories, their strategies, and performance. 15 Interm-Term Govt Bonds 5 30-day T-Bills 0% Risk (Standard Deviation) 5 15 15 20 25 January 2004 through December 2006 Category Name Equity Focus Objective Mechanics Avg Tot Ret Annlzd % Avg Std Dev % Max Corr with Drawdown % S&P 500 Equity Net Long Capitalize on rising market Have core holding of long stock positions and hedge portfolio slightly with small short positions in stocks. Divide exposure equally between long and short stock positions. Dedicate most of portfolio to short stock positions. Some funds take small long positions. Use both long and short stock positions. Manager adjusts long/ short exposure based on predicted direction of equity market. Take long and short positions in sets of related securities, using numerous arbitrage strategies. Highly leveraged. Buy a company’s convertible bond and short its stock. Use leverage. Exploit inefficiencies in the pricing of bonds. Highly leveraged. Buy or short elements of a company’s capital structure, such as debt, convertibles, and stock. Take long positions or exploit pricing discrepancies between parts of company’s capital structure. May try to influence firm’s outcome. Buy shares in the company to be acquired while selling shares in the buyer. Often use derivatives to hedge risk. Buy stocks, bonds, currencies, derivatives, and commodities to take advantage of top-down views of world economies. Invest in equities and fixed income issued by corporations and governments in emerging markets. Use quantitative models to price futures, then take long and short positions in the futures. Divide fund among different investment tactics. Adjust balance based on market movements. Invest in other hedge funds to fill a portfolio that provides broad exposure to hedge fund strategies. 12.84 6.28 –3.87 0.77 Equity Net Neutral Equity Net Short Provide market neutral returns Capitalize on falling market 8.00 –7.06 2.65 7.68 –1.33 –20.32 0.56 –0.86 Equity Variable Capitalize on falling or rising market 10.83 5.02 –2.95 0.69 Arbitrage Relative Value Arbitrage Provide market neutral returns 8.37 2.40 –1.46 0.57 Convertible Arbitrage Fixed Income: Arbitrage Corporate Life Cycle Provide market neutral returns Provide market neutral returns Profit from atypical company events 6.25 7.97 12.08 3.22 1.22 4.62 –4.19 –0.06 –1.92 0.31 0.40 0.71 Corporate Event Driven Distressed Companies Profit from financially troubled companies Profit from mergers and acquisitions 16.56 3.79 –0.71 0.60 Merger Arbitrage 8.69 2.73 –1.37 0.69 Macroeconomic Trends Global Macro Profit from global economic trends 8.46 4.77 –3.51 0.59 Emerging Markets Profit from developing nations 23.31 7.73 –4.71 0.63 Managed Futures Profit from futures market 7.30 6.90 –6.91 0.53 Combinations Multi Strategy Provide exposure to multiple strategies 9.91 3.46 –1.35 0.67 Fund of Funds Provide exposure to multiple strategies 8.24 4.07 –2.72 0.66 23

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Spring 2007

Morningstar Advisor Spring 2007 Features Departments Letter from Joe Mansueto Get to Know Morningstar’s Fund Managers of the Year Is Your Client a Stock or a Bond? Less Alpha, More Beta Than Meets the Eye Your Mileage May Vary A Clear-Eyed Look at Hedge Funds Lower Risk, Higher Returns, What’s Not to Like? Without Cash and Clout, Advisors and Clients Get Short End of Stick Get the Strategy Minus the Headaches Analyzing Funds of Hedge Funds Not All Hedge Funds Are Created Equal A Fund with a (Long) View Laying Low and Prospering A Menu of Ideas to Fill Five Market Baskets Oil and Gas Gushing with Values Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web You Can’t Always Get What You Want

Morningstar Advisor - Spring 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.