Morningstar Advisor - Spring 2007 - (Page 34)

Hands-On Morningstar Category Fund of Funds No United States 500,000 12 1.0 10.0 1,922 913 95 59 25 16 11 Screen for Funds of Hedge Funds: Finding a Needle in a Haystack You can quickly narrow the universe by homing in on the funds that meet your client’s investment criteria. Every client has different goals and profiles, but a good beginning screen: Excludes funds that are closed to new investors Includes only funds that are open to U.S. investors Sets a maximum initial investment level Finds funds that have a one-year or shorter lockup Sets maximums for management fee and performance fee (typical fund of funds charge 1% management and 10% performance fees) and and and and and and Closed to New Inv Country Available for Sale Minimum Initial Lockup Months Management Fee Performance Fee Next, screen for a strategy you and your client want to pursue. With funds of hedge funds, searching by strategy can be a little tricky, because most hedge fund databases, including Morningstar’s, put these funds in a murky category called fund of funds. Obviously, that name sheds little light on the funds’ strategies. All is not lost, however, because almost 50% of funds of funds in Morningstar’s database list secondary (and sometimes tertiary) strategies. Funds may list one of more than 50 secondary strategies, ranging from the 14 individual hedge-fund categories to strategies that specify a particular geographic region, asset class, or trading approach. For example, you might search for: All funds of funds with an equity net long strategy Hedging Strategies Capital Structure Arbitrage Closed End Fund Arbitrage Commodities Convertible Arbitrage Corporate Bonds Corporate Event Driven CTA Currency Directional Emerging Markets Energy Equities- Pairs Trading Equity Net Long Exposure Equity Net Neutral Exposure Equity Net Short Exposure Equity Variable Exposure Europe Event Driven Financial Fixed Income: Arbitrage Fixed Income: High Yield Fixed Income: Mortgage-Backed Fixed Income: Other Fund of Funds Futures Global Macro Discretionary Growth Healthcare Interest Rates International Japan Large Cap Latin America Long Only Long Volatility Managed Futures Market Neutral Media/Communications Merger Arbitrage Multi Strategy Non-US Government Bonds Opportunistic Option Trading Other Arbitrage Regulation D Relative Value Short Selling Short Term Trading Small Cap Special Situations Statistical Arbitrage Tactical Asset Allocation Technology UK Value Volatility Arbitrage Volatility Trading In Advisor Workstation, you would do this by using search criteria to drill down into a specific strategy and create an Investment List. A good screen quickly narrows your investment list to a few candidates. Then, dive into the data of each fund by studying its Snapshot Report. You can screen funds of funds on more than 50 hedging strategies. 34 Morningstar Advisor Spring 2007

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

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