Shed Light

Are hedge funds leaving you in the dark? Morningstar's extensive database might be a good place to start your research.
Magazine Contributor
3 min read

This story appears in the April 2007 issue of Entrepreneur. Subscribe »

Face it, hedge funds are cool. They have a cloak-and-dagger sexiness about them, and their relative exclusivity makes them fun to talk about. Just for the record, I don't particularly endorse this view of hedge funds, because overall, they don't appear to perform better than plain ol' mutual funds, despite the fact that their expense ratios are almost criminally high. But that's just me. Facts are facts--and the facts say hedge funds are hot right now.

Accordingly, curious investors ought to have an opportunity to learn as much about them as possible. That's where Morningstar comes in. Morningstar started selling encyclopedic volumes of mutual fund information back in the '80s, before anyone else was providing such information. Now it's trying to do the same for hedge funds, this time online. If you're interested in putting money into the hedge fund world, Morningstar's growing database is as good a place as any to start.

Professional advisors can spend as much as $15,000 annually with Morningstar for things like hard-core analysis and portfolio construction. But individual investors--who should have a broker or financial advisor anyway--need to spend only $135 a year to tap into an extensive universe of information. (You can get the goods on mutual funds, exchange-traded funds and other investments, too.) For that money, you can track 15 hedge fund categories, from convertible arbitrage to equity net short to funds of funds.

It's in dissecting the categories for information on individual funds that the magic emerges. Morningstar tracks performance, risk, strategy and fee information in a way that quickly becomes addictive. It's all searchable, and I found it easy to spend hours pouring over the database. That brings up the big caveat: Because of the nature of the hedge fund beast, don't make investment decisions based on this database alone. Use it to check your financial planner's recommendations or find funds that might pique your interest. But don't send off a $500,000 check just because something looks good on Morningstar. The database is good, but not that good.

It's worth noting that Morningstar won't let you peruse the hedge funds portion of the site unless you certify that you have at least $200,000 in income or $1 million in liquid net worth--which is a good thing. It helps the rest of us avoid temptation. Even with Morningstar's commendable database, there is still more darkness than light--and more hype than performance--in hedge funds.

Scott Bernard Nelson is a newspaper editor and freelance writer in Portland, Oregon.

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