Morningstar, Inc has begun to calculate estimated returns for hedge funds based on publicly available filings. The company has estimated quarterly returns for approximately 1,700 hedge funds, including some of the largest and most prominent in the industry.
Although hedge funds do not have to publicly file disclosures, many entities that hold hedge funds, like registered funds of hedge funds, do. Morningstar culls information from these funds of funds using two types of filings to estimate returns—portfolio holdings disclosures and financial statements. From these filings, Morningstar collects the beginning market value of an individual hedge fund holding in a fund of hedge funds and the ending market value. If the fund of funds did not add or remove cash from the underlying hedge fund during the period, Morningstar can calculate an estimated return.
"The vast majority of hedge fund assets are concentrated in a small number of very large funds, and it's precisely these funds that are the least likely to report performance," says John Rekenthaler (pictured), vice president of research for Morningstar. "These new estimated returns can provide a unique window into the performance of popular hedge funds and the entities that invest in them."
When multiple registered funds of hedge funds hold the same hedge fund, Morningstar reports the median return as the estimated performance. Morningstar also lists each individual performance estimate related to the fund as well as the name of the registered hedge fund investor. Performance estimates of a fund may vary from one investor to another due to differences such as fees.
"In contrast to the self-reported composite returns provided to hedge fund databases or the audited performance numbers in registered funds' annual reports, estimated performance reflects the actual experience of specific investors. With estimated returns, we not only get an overall picture of performance, but we can see how different investors fared with their investments in the same hedge fund," Rekenthaler adds.