February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Hedge Fund Indices
Global Summary
Fourth Quarter 2008 Report
Published February 2009
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
1
TABLE OF CONTENTS
QUARTERLY INDEX SUMMARY 1
Performance Analysis Summary 2 Asset Flows and Index Structure 3
COMPOSITE INDEX PERFORMANCE ANALYSIS 4
Hedge Funds vs Other Asset Classes 4 Performance Analysis by Fund Size 4 Hedge Fund Segment Breakdown 5 Performance by Geography of Investments 6
STRATEGY INDICES DETAILED ANALYSIS 7
Risk Analysis 7 Performance Analysis 8 Strategy Correlation Analysis 10
ASSET FLOW BY STRATEGY 10
HEDGE FUND INDEX REPORTS 15
Morningstar HF Arbitrage wMSCI 15 Morningstar HF Composite Asset Weighted wMSCI 16 Morningstar HF Composite Equally Weighted wMSCI 17 Morningstar HF Composite Offshore wMSCI 18 Morningstar HF Composite Onshore wMSCI 19 Morningstar HF Composite Small Funds wMSCI 20 Morningstar HF Convertible Arbitrage wMSCI 21 Morningstar HF Developed Markets wMSCI 22 Morningstar HF Directional Trading wMSCI 23 Morningstar HF Distressed Securities wMSCI 24 Morningstar HF Emerging Markets wMSCI 25 Morningstar HF Equity wMSCI 26 Morningstar HF Europe wMSCI 27 Morningstar HF Event-Driven wMSCI 28 Morningstar HF Fixed-Income wMSCI 29 Morningstar HF Multi-Process Group wMSCI 30 Morningstar HF North America wMSCI 31 Morningstar HF Relative Value wMSCI 32 Morningstar HF Specialist Credit wMSCI 33 Morningstar HF Statistical Arbitrage wMSCI 34
NOTICE & ABOUT MORNINGSTAR, INC. 35
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
2
Morningstar Hedge Fund Indices wMSCI Methodology Fourth Quarter Performance Summary
4th Qtr 1 Yr 2007 3 Yr Std Dev
3 yr
Sharpe
3 yr
Sortino
3 yr
Morningstar HF Composite Asset Weighted wMSCI -8.94% -13.16% 13.93% 7.11% 5.99% 0.02 0.03 Morningstar HF Composite Core Funds wMSCI -8.81% -15.53% 14.24% 3.90% 6.43% -0.06 -0.07 Morningstar HF Composite Equally Weighted wMSCI -9.05% -16.42% 13.93% 3.13% 6.48% -0.17 -0.21 Process Groups
Morningstar HF Directional Trading wMSCI -5.88% 3.51% 10.21% 21.40% 5.60% 0.58 0.81 Morningstar HF Specialist Credit wMSCI -7.33% -22.16% 11.65% -5.77% 6.83% -0.45 -0.51 Morningstar HF Multi-Process Group wMSCI -10.20% -19.56% 15.00% -1.14% 6.95% -0.26 -0.31 Morningstar HF Relative Value wMSCI -7.71% -14.68% 7.75% -0.60% 5.46% -0.53 -0.59 Morningstar HF Security Selection wMSCI -11.16% -24.78% 18.33% -4.59% 9.10% -0.22 -0.27 Asset Class Morningstar HF Equity wMSCI -10.37% -21.81% 16.89% -2.22% 0.08 -20.00% -0.24 Morningstar HF Fixed Income wMSCI -7.09% -20.08% 9.36% -6.95% 0.06 -57.00% -0.63 Morningstar HF Diversified wMSCI -5.61% -0.96% 11.14% 19.64% 0.05 53.00% 0.75
Geography
Morningstar HF Developed Markets wMSCI -7.33% -12.11% 11.06% 3.85% 5.71% -0.12 -0.15 Morningstar HF Emerging Markets wMSCI -15.78% -33.37% 23.21% -7.61% 11.33% -0.19 -0.23 Morningstar HF Global Markets wMSCI -11.77% -22.23% 25.87% 7.30% 8.84% 0.09 0.12 Morningstar HF Europe wMSCI -6.94% -11.54% 10.12% 4.49% 6.08% 0.06 0.07 Morningstar HF North America wMSCI -8.71% -18.74% 12.08% -2.54% 7.08% -0.37 -0.44 Morningstar HF Japan wMSCI -6.03% -11.88% 1.89% -16.87% 7.33% -0.31 -0.43
Domicile
Morningstar HF Composite Offshore wMSCI -9.13% -17.17% 14.05% 1.52% 6.72% -0.12 -0.14 Morningstar HF Composite Onshore wMSCI -8.54% -15.47% 13.93% 3.13% 6.48% -0.17 -0.21
MSCI World Index and LB Global Aggregate Bond Index
MSCI World Index (USD) Net Index -15.25% -40.71% 21.09% -22.38% 12.07% -0.12 -0.14 Barclays U.S. Aggregate Bond Index -3.83% 4.78% 8.20% 22.33% 4.86% -0.17 -0.25
Note: Data is as of December 31, 2008. All hedge Fund indices listed above are equally weighted unless noted otherwise.
Morningstar Hedge Fund Indices – Fourth Quarter Performance Analysis Summary
In the last quarter of 2008, the Morningstar Hedge Fund Composite Index wMSCI Methodology underperformed fixed income and outperformed equity. The Morningstar HF Composite Index wMSCI declined 9.05% while the Barclays U.S. Aggregate Bond Index and the MSCI World Index declined 3.83% and 15.25% respectively. During the same period, the Asset Weighted
Morningstar HF Composite Index wMSCI underperformed the Barclays U.S. Aggregate Bond Index and outperformed equity with a return of -8.94%.
Among Process Groups, the Morningstar Directional Trading Index wMSCI produced the smallest fourth quarter decline of 5.88%, while the Morningstar Security Selection Index wMSCI produced the largest decline of 11.16%. The Morningstar Directional Trading Index wMSCI also had the highest year-to-date return of 3.51%, while the Morningstar HF Security Selection Index wMSCI had the lowest return of -24.78%.
Funds in the Morningstar Hedge Fund Composite Index wMSCI focusing on the Japan region outperformed all other regions in the last quarter of 200 with a return of -6.03%. However, for the year, funds in the European region performed slightly better than those in Japan with a return of -11.54% versus -11.88%. Among other geographic areas, funds focused on diverse
developed markets (-7.33%) outperformed those solely investing in North American funds (-8.71%) for the quarter and emerging markets posted the lowest return of -15.78%. Funds investing in emerging markets also posted the lowest year-to-date returns with a decline of 33.37%. (Please note: all Morningstar Hedge Fund Indices wMSCI are hedged into US Dollars to
mitigate the effects of currency translation.)
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
3
Q4 Asset Flow
($7,000)
($6,000)
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
Discretionary
Trading
Systematic
Trading
Event-Driven Arbitrage Merger Arbitrage Statistical
Arbitrage
Long Bias Short Bias Variable Bias Distressed
Securities
Long-Short Credit
Net Asset Flow (in Millions of U
SD)
Overall asset flows for funds in the Morningstar Hedge Fund Composite Index wMSCI were negative in the last quarter of 200. Among the investment process group indices, Directional Trading-Systematic Trading, Relative Value-Merger Arbitrage and Relative Value-Statistical Arbitrage were the exceptions with positive overall inflows. Directional Trading-Systematic Trading
saw the largest overall inflow of assets and Security Selection-Long Bias saw the largest overall outflow of assets.
Morningstar Hedge Fund Indices – Index Structure
Hedge Fund Composites
Process Group Process Group Process Group Process GroupProcess Group
Directional Trading Security Selection Specialist Credit Multi-ProcessRelative Value
Investment Process
Discretionary Trading
Tactical Allocation
Systematic Trading
Multi-Process
Long Bias
No Bias
Short Bias
Variable Bias
Distressed Securities
Long-Short Credit
Private Placements
Multi-Process
Event Driven
Multi-Process
Arbitrage
Merger Arbitrage
Statistical Arbitrage
Multi-Process
Strategy Indices
Investment ProcessInvestment ProcessInvestment ProcessInvestment Process
Strategy Indices Strategy Indices Strategy Indices Strategy Indices
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
4
Composite Index Performance Analysis
Performance Summary - Hedge Fund vs. Other Asset Classes
In the final quarter of 2008, the Asset Weighted Morningstar Hedge Fund Composite Index wMSCI underperformed the
Barclays U.S. Aggregate Bond Index and outperformed the MSCI World Index. However, the Asset Weighted Morningstar Hedge Fund Composite Index wMSCI continued to outperform the Bond and Equity Indexes in overall returns over the past nine years.
0
500
1000
1500
2000
2500
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
Morningstar HF Composite
Asset Weighted wMSCI
MSCI World Index (USD) Net
Index
Barclays U.S. Aggregate
Bond Index
Performance Summary by Fund Size
In the final quarter of 2008, smaller funds underperformed larger funds in the Asset Weighted Morningstar Hedge Fund Composite Index wMSCI. The Morningstar Composite Small Funds Index wMSCI returned -7.15% while the Morningstar Core
Funds Index wMSCI returned -6.15%. Over the past year, smaller funds have also underperformed the Morningstar Core funds Index wMSCI, returning -17.24% and -15.53% respectively. The performance differential is depicted in the following chart along with the performance of the Morningstar Composite Asset Weighted Index wMSCI as a benchmark. Hedge funds in the Morningstar Core Index wMSCI are those with over $100
million in assets under management, while hedge funds in the Morningstar Small Index wMSCI have between $15 and $100 million in assets under management.
1000
1200
1400
1600
1800
2000
2200
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
Morningstar HF Composite
Asset Weighted wMSCI
Morningstar HF Composite
Small Funds wMSCI
Morningstar HF Composite
Core Funds wMSCI
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
5
16%
51%
8%
14%
11%
Relative Value Security Selection Specialist Credit
Directional Trading Multi-Process Group
11%
61%
25%
1%2%
Fixed Income Equtiy DiversifiedCommodities Convertibles
Performance Summary by Capitalization Focus
Small cap funds within the Morningstar Hedge Fund Composite Index wMSCI underperformed those invested in mid and
large caps over last quarter of 2008 with returns of -18.21% and -6.67% respectively. While small cap-focused funds continued to outperform mid and large cap funds for the nine year period, the fourth quarter of 2008 brought the index down to its 2004 level.
0
500
1000
1500
2000
2500
3000
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
Morningstar HF Composite
Asset Weighted wMSCI
Morningstar HF Small Cap
wMSCI
Morningstar HF Mid and
Large Cap wMSCI
Hedge Fund Investments Segments - Asset Class Focus, Process Group Breakdown and Geographical Focus
Asset Class Focus
A majority of funds in the Morningstar Hedge Fund
Composite Index wMSCI invested in equities (61%) while a quarter of funds had diversified holdings (25%). The remaining funds invested in fixed income (11%),
convertibles (2%) and commodities (1%).
Process Group Breakdown
About half of the funds in the Morningstar Hedge Fund Composite Index wMSCI followed a security selection process. The remaining half of the funds followed relative
value (16%), directional trading (14%), multi-process group (11%) and specialist credit (8%) processes.
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
6
11%17%
72%
Emerging Markets Developed Markets Global Markets
Geographical Focus
The vast majority of funds in the Morningstar Hedge Fund Composite
Index wMSCI invested in developed markets (72%) while the remaining funds invested in global markets (17%) and emerging markets (11%). Of those funds in the Morningstar Hedge Fund Composite Index wMSCI that identified an area within these regions,
most invested in diversified markets (42%) and North American markets (38%). The remainders invested in Europe (15%), Japan (4%), and Pacific ex Japan (1%).
Hedge Fund Performance by Geography of Investments
-25%
-20%
-15%
-10%
-5%
0%
5%
4th qtr 2008
Composite Equally
Weighted
Developed Markets Diversified
Developed Markets
Emerging Markets
Europe Global Markets Japan MSCI World
4th qtr 2008 -6.52% 0.15% -5.33% -15.07% -3.19% -5.93% -1.67% -21.77%
6 Months -14.98% -5.55% -12.27% -28.47% -9.92% -17.00% -7.60% -33.70%
1 Yr -16.42% -0.29% -12.11% -33.37% -11.54% -22.23% -11.88% -40.71%
3 Yr 2.13% 17.86% 3.85% -7.61% 4.49% 7.30% -16.87% -22.38%
-45%
-35%
-25%
-15%
-5%
5%
15%
25%
1 Yr 3 Yr
Developed markets-diversified strategies produced the best returns for the fourth quarter with returns of 0.15% and for the three year time period with returns of 17.8%. Meanwhile, emerging markets funds produced some of the lowest returns with -15% for the fourth quarter and -7.61% for the three year period ending December, 2008. Japan-focused funds outperformed European-
focused funds in the fourth quarter of 2008, but they still lag behind European-region funds over the 1 and 3 year periods. Though many of these hedge funds did not live up to their goal of producing absolute returns, both developed and emerging market hedge funds have nonetheless fared better in this past quarter’s market downturn than the MSCI World Index.
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
7
Strategy Indices Detailed Analysis
Strategy Index Risk Characteristics over 3 Years
3-Yr Standard Deviation and Sortino Analysis
0%
2%
4%
6%
8%
10%
12%
Arbitrage
Distressed Securities
Event-Driven
Multi-Process
Statistical Arbitrage
Systematic Trading
Merger Arbitrage
Long Bias
No Bias
Short Bias
Variable Bias
Long-Short Credit
3-Yrr Standard Deviation (%)
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
3-Yr Sortino Ratio
3 yr standard Dev 3 year Sortino
Of the indices, the Morningstar Directional Trading Index wMSCI had the highest three-year Sortino ratio, but it is followed
closely by the Morningstar Diversified Index wMSCI. The Morningstar Convertible Arbitrage Index wMSCI had the lowest Sortino ratio while the Morningstar Arbitrage Index wMSCI had the second-lowest. The Morningstar Small Cap Index wMSCI had the highest three-year standard deviation among the displayed hedge fund indices. Meanwhile, the Morningstar Statistical Arbitrage Index wMSCI had the lowest three-year standard deviation. 3 Year Standard Deviation vs. Risk vs. Size Analysis
3-Year Standard Deviation vs Return Analysis
Arbit rage
Composit e AW
Convert ible Arbit rage
Direct ional Trading
Diversif ied
Equit y Event -Driven
Fixed Income
Mult i-Process Relat ive Value
Secur it y Select ion
Small Cap
Specialist Credit
St at ist ical Arbit rage
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
4% 6% 8% 10% 12% 14%
3-Year Standard Deviation
3-Year Return
The Morningstar Diversified Index wMSCI and the Morningstar Directional Trading Index wMSCI exhibited the highest risk/reward characteristics over the past three years. Conversely, over the same time period the Morningstar Convertible Arbitrage Index wMSCI and the Morningstar Small Cap Index wMSCI displayed the poorest risk/reward attributes.
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
8
Performance Comparison between Best and Worst Performing Strategy Indices Since 2004
Distressed Securities Systematic Trading
Long Bias
Long Bias
Statistical Arbitrage
Distressed Securities
Systematic Trading
Variable Bias
Arbitrage Systematic Trading
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2004 2005 2006 2007 2008
In 2008, the Morningstar Systematic Trading Index wMSCI had the best performance with a return of 11.7%. During the same time period, the Morningstar Long Bias Index wMSCI had the worst performance with a return of -31.75%. Between 2004 and 2007, all strategy indices netted positive returns each year.
Strategy Index Performance over 1, 3, and 5 Years
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Arb
itrag
e
Distres
sed
Sec
urities
Even
t-Driv
en
Multi-
Proc
ess
Sta
tistic
al A
rbitr
age
Sys
tem
atic T
rading
Mer
ger Arb
itrag
e
Long
Bias
No
Bias
Sho
rt B
ias
Varia
ble
Bias
Long
-Sho
rt C
redit
1 yr Return (%) 3 yr Return (%) 5 yr Return (%)
The Morningstar Systematic Trading Index wMSCI stands out as the best performing strategy for the one year period ending December 2008. Funds in this index tend to track price trends in liquid derivatives and have profited from the upward trend in commodities and a downward trend in the U.S. dollar.
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
9
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2008 Return
Quartile 1 2008 Quartile 3 2008 Median 2008
-40%
-30%
-20%
-10%
0%
10%
20%
4th Quarter Return
Quartile 1 Q4 Quartile 3 Q4 Median Q4
Strategy Index Return Distribution (1 and 3 Year performance)
Over the final quarter of 2008, the Systematic Trading strategy performed the best for all for all quartiles. There was substantial variation in performance in all strategies for the quarter; however, the Merger Arbitrage strategy had the smallest
25th/75th spread of 4.5%. Meanwhile, the Long Short Credit strategy had the largest 25th/75th spread of 24.6%. The past year tells a story similar to the past quarter. The Systematic Trading strategy still performed the best for all quartiles for the year. The Merger Arbitrage strategy also had the smallest 25th/75th spread of 4.4% for the past year and the Long Short Credit strategy had the largest spread of 44.7%.
Long Bias No Bias Variable
Bias
Short
Bias
Systematic
Trading
Discretionary
Trading Arbitrage
Merger
Arbitrage
Statistical
Arbitrage
Multi
process Event-Driven
Distressed
Securities
Long Short
Credit
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
10
Strategy Index Correlation Matrix Since 2000
Arbitrage
Discrectionary Trading
Distressed Securities
Event-Driven
Long Bias
Long-Short Credit
Merger Arbitrage
Multi-Process Group
No Bias
Short Bias
Statistical Arbitrage
Systematic Trading
Variable Bias
MSCI World Index (USD) Net Index
Barclays U.S. Aggregate Bond Index
Arbitrage 1.00
Discrectionary Trading 0.66 1.00
Distressed Securities 0.70 0.60 1.00
Event-Driven 0.59 0.67 0.81 1.00
Long Bias 0.57 0.71 0.77 0.85 1.00
Long-Short Credit 0.68 0.61 0.85 0.74 0.74 1.00
Merger Arbitrage 0.62 0.63 0.53 0.79 0.66 0.53 1.00
Multi-Process Group 0.71 0.76 0.84 0.95 0.90 0.81 0.74 1.00
No Bias 0.59 0.83 0.70 0.78 0.86 0.73 0.66 0.86 1.00
Short Bias -0.20 -0.32 -0.45 -0.52 -0.77 -0.46 -0.32 -0.52 -0.55 1.00
Statistical Arbitrage 0.33 0.46 0.28 0.37 0.32 0.32 0.39 0.42 0.51 -0.03 1.00
Systematic Trading -0.09 0.25 -0.10 0.01 -0.04 -0.07 0.01 0.04 0.17 0.16 0.21 1.00
Variable Bias 0.53 0.78 0.67 0.78 0.92 0.71 0.62 0.86 0.90 -0.65 0.40 0.12 1.00
MSCI World Index (USD) Net Index 0.51 0.57 0.66 0.75 0.83 0.56 0.58 0.75 0.61 -0.67 0.19 -0.20 0.66 1.00
Barclays U.S. Aggregate Bond Index 0.30 0.21 0.03 -0.03 -0.01 0.11 0.13 0.04 0.11 0.06 0.10 0.20 0.04 -0.04 1.00 Nine of the 13 strategy indices show positive correlation with both the MSCI World Index and the Barclays U.S. Aggregate Bond Index since 2000. Exceptions are Event Driven and Long Bias, which correlated slightly negatively with Barclays, and Short Bias and Systematic Trading, which showed higher negative correlations with the MSCI World Index.
Asset Flows by Strategy (In Millions of USD)
Strategy 31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08 Q4 Asset Flow
Discretionary Trading Asset Flow ($1,225,409,590.60) ($1,131,352,147.77) $673,719,178.62 ($357,805,433.07) ($2,222,847,080.84) ($1,906,933,335.29)
Systematic Trading Asset Flow ($5,272,684,291.01) ($254,851,175.04) $3,656,008,840.46 $906,308,059.35 ($3,138,391,848.43) $1,423,925,051.39
Event-Driven Asset Flow ($1,641,801,810.68) $1,420,195,382.79 ($1,184,196,081.70) ($1,422,931,953.61) $1,147,509,765.54 ($1,459,618,269.77)
Multi Process Group Asset Flow ($140,633,149.84) $1,445,599,963.00 ($1,165,302,181.26) $305,010,586.01 ($917,021,189.43) ($1,777,312,784.69)
Arbitrage Asset Flow ($276,193,856.87) ($8,316,541,062.22) ($3,320,361,952.72) ($170,595,690.46) ($124,584,146.39) ($3,615,541,789.58)
Merger Arbitrage Asset Flow ($17,142,149.11) ($888,497.61) ($1,436,683.76) ($50,780,230.97) $440,082,071.34 $387,865,156.62
Statistical Arbitrage Asset Flow $1,520,521,036.53 ($515,912,930.02) ($664,150,999.09) $815,424,722.78 ($128,785,885.20) $22,487,838.49
Long Bias Asset Flow ($221,437,058.03) ($2,001,686,880.17) ($1,017,452,365.59) ($694,635,629.12) ($4,459,173,461.65) ($6,171,261,456.36)
Short Bias Asset Flow $2,992,481.50 $25,364,757.40 ($86,297,021.50) ($590,990,136.00) $68,967,516.80 ($608,319,640.70)
Variable Bias Asset Flow ($342,710,401.34) ($335,656,460.10) ($845,074,263.81) $222,733,367.50 ($1,147,766,917.41) ($1,770,107,813.71)
Distressed Securities Asset Flow ($458,867,240.21) ($3,656,369,990.66) $1,703,434,254.06 $292,336,372.73 ($4,080,656,370.71) ($2,084,885,743.91)
Long-Short Credit Asset Flow $18,933,558.00 ($982,006,775.61) ($831,599,922.90) $104,449,166.14 $197,111,534.40 ($530,039,222.36)
Q4 Asset Flow Diagrams
Discretionary Trading Asset Flows
1.66%
-0.12%
-4.99%
-4.37%
-2.15%
($2,500)
($2,000)
($1,500)
($1,000)
($500)
$0
$500
$1,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-5%
-4%
-3%
-2%
-1%
0%
1%
2%Mon
thly Return (%)
Discretionary Trading Asset Flow Discretionary Trading Performance
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
11
Systematic Trading Asset Flows
1.33%
-1.47%
0.47%
6.58%
2.81%
($6,000)
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
Mon
thly Return (%)
Systematic Trading Asset Flow Systematic Trading Performance
Event Driven Asset Flows
-0.45%
-1.77%
-4.53%
-7.04%
0.26%
($2,500)
($2,000)
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Mon
thly Return (%)
Event-Driven Asset Flow Event-Driven Performance
Multi-Process Group Asset Flows
-1.24%
-7.49%
-5.59%
-2.36%
-0.38%
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%Mon
thly Return (%)
Multi Process Group Asset Flow Multi Process Group:Performance
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
12
Arbitrage Asset Flows
-0.67%
-10.96%
-1.80%
-7.23%
2.27%
($9,000)
($8,000)
($7,000)
($6,000)
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-12%-11%-10%
-9%-8%-7%-6%
-5%-4%-3%-2%
-1%0%1%2%
3%4%
Mon
thly Return (%)
Arbitrage Asset Flow Arbitrage Performance
Merger Arbitrage Asset Flows
1.53%
-3.36%
-0.22%
-3.54%
2.13%
($100)
$0
$100
$200
$300
$400
$500
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
Mon
thly Return (%)
Merger Arbitrage Asset Flow Merger Arbitrage Performance
Statistical Arbitrage Asset Flows
-2.88%
-4.69%
0.76%-0.18%
0.86%
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
Mon
thly Return (%)
Statistical Arbitrage Asset Flow Statistical Arbitrage Performance
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
13
Distressed Securities Asset Flows
-1.26%
-11.05%
-5.43% -3.95%
-4.26%
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-12%
-11%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%Mon
thly Return (%)
Distressed Securities Asset Flow Distressed Securities Performance
Long Bias Asset Flows
-2.08%
-11.30%
-4.30%
1.24%
-8.43%
($5,000)
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-15%
-13%
-11%
-9%
-7%
-5%
-3%
-1%
1%
3%
Mon
thly Return (%)
Long Bias Asset Flow Long Bias Performance
Short Bias Asset Flows
-2.05%
2.57%
-0.12%
7.85%
2.88%
($700)
($600)
($500)
($400)
($300)
($200)
($100)
$0
$100
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Mon
thly Return (%)
Short Bias Asset Flow Short Bias Performance
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
14
Variable Bias Asset Flows
-5.55%
-1.74%
-1.60%
-6.18%
0.12%
($1,400)
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
Mon
thly Return (%)
Variable Bias Asset Flow Variable Bias Performance
Long/Short Credit Asset Flows
-6.87%
-3.47%
0.01%
-4.97%
-3.13%
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
31-Aug-08 30-Sep-08 31-Oct-08 30-Nov-08 31-Dec-08
Asset Flows (M
illion
s of USD)
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Mon
thly Return (%)
Long-Short Credit Asset Flow Long-Short Credit Performance
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
15
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Arbitrage wMSCI Index Classification
Process Group Relative Value
Investment Process Arbitrage
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jul-94
Consitituent Weighting Equal
Number of Funds in Index 70
Domicile ALL
Assets in Index (US$MM) 15,109
Currency USD
Other Index Information (Avg)
Management Fees 1.793
Incentive Fees 20
Advance Notice Time (days) 47.57
Lockup Period (months) 7.03
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Arbitrage wMSCI -8.74% -10.58% -19.49% -5.11% -1.97%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 7.42% 6.21%
Downside Deviation 6.86% 5.74%
Sharpe Ratio -0.610 -0.260
Sortino Ratio -0.660 -0.280
Alpha (vs. MSCI World) 0.001 0.000
Beta (vs. MSCI World) 0.420 0.370
% Positive Months 72.22% 68.33%
R-squared (vs. MSCI World) 0.740 0.650
Growth of 1,000
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Arbitrage wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most hedge fund strategies. The index includes both
US and non-US domiciled funds. The index rate of return is the equally-weighted average of the net rates of return of each of the consituent
funds in the index. Funds within this index focus on exploiting anomalies in price spreads between related or similar instruments
This index, which outperformed the Convertible Arbitrage hedge fund index by over 10% in 2008, was dragged down by a group of fixed-
income arbitrageurs that were caught up in the high-yield default boom that occurred in November. Constituents in this index had an
average December return of 2.27%, but this did not make up for the lost value during the second half of 2008.
84%
13%
3%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
16
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Asset Weighted wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Asset
Number of Funds in Index 873
Domicile ALL
Assets in Index (US$MM) 178,385
Currency USD
Other Index Information (Avg)
Management Fees 1.794
Incentive Fees 20
Advance Notice Time (days) 47.65
Lockup Period (months) 7.07
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Composite Asset Weighted wMSCI -8.95% -4.77% -13.16% 7.11% 23.68%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 5.99% 5.25%
Downside Deviation 4.85% 4.28%
Sharpe Ratio 0.020 0.590
Sortino Ratio 0.030 0.720
Alpha (vs. MSCI World) 0.004 0.004
Beta (vs. MSCI World) 0.310 0.320
% Positive Months 63.88% 65.00%
R-squared (vs. MSCI World) 0.670 0.680
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Composite Asset Weighted wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most hedge fund strategies. The index includes both
US and non-US domicile funds. The index rate of return is the weighted average of the net rates of return of each of the constituent funds in
the Index. Morningstar's Composite Hedge Fund Indices are made up of funds utilizing all process groups, investment processes, asset
classes, and geographic regions.
The composite index posted another down quarter--albeit much less severe than previous Q3. Large allocations to cash helped many funds in
the composite index to outperform broad market indexes including the MSCI World Index and equity indexes like the S&P 500. Nonetheless,
Q4 capped off an abysmal year for hedge funds whose managers often tout their ability to produce absolute returns.
11%
73%
16% Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
17
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Equally Weighted wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 873
Domicile ALL
Assets in Index (US$MM) 178,385
Currency USD
Other Index Information (Avg)
Management Fees 1.794
Incentive Fees 20
Advance Notice Time (days) 47.65
Lockup Period (months) 7.07
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Composite Equally Weighted wMSCI -9.05% -6.52% -16.42% 2.13% 18.09%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.59% 5.83%
Downside Deviation 5.39% 4.81%
Sharpe Ratio -0.140 0.440
Sortino Ratio -0.170 0.530
Alpha (vs. MSCI World) 0.003 0.003
Beta (vs. MSCI World) 0.370 0.380
% Positive Months 63.88% 65.00%
R-squared (vs. MSCI World) 0.780 0.780
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Composite Equally Weighted wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most hedge fund strategies. The index includes both
US and non-US domicile funds. The index rate of return is the equally-weighted average of the net rates of return of each of the constituent
funds in the Index. Morningstar's Composite Hedge Fund Indices are made up of funds utilizing all process groups, investment processes,
asset classes, and geographic regions.
The composite index posted another down quarter--albeit much less severe than previous Q3. Large allocations to cash helped many funds in
the composite index to outperform broad market indexes including the MSCI World Index and equity indexes like the S&P 500. Nonetheless,
Q4 capped off an abysmal year for hedge funds whose managers often tout their ability to produce absolute returns.
16%
73%
11%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
18
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Offshore wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 526
Domicile Offshore
Assets in Index (US$MM) 127,345
Currency USD
Other Index Information (Avg)
Management Fees 1.777
Incentive Fees 20
Advance Notice Time (days) 46.63
Lockup Period (months) 6.65
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Composite Offshore wMSCI -9.13% -6.67% -17.17% 1.52% 18.00%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.72% 5.80%
Downside Deviation 5.56% 4.86%
Sharpe Ratio -0.120 0.370
Sortino Ratio -0.140 0.440
Alpha (vs. MSCI World) 0.003 0.003
Beta (vs. MSCI World) 0.380 0.380
% Positive Months 63.88% 65.00%
R-squared (vs. MSCI World) 0.780 0.780
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Composite Offshore wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most hedge fund strategies. The index includes funds
domiciled outside the US. Index performance is derived through equally weighting of funds returns. Morningstar's Composite Hedge Fund
Indices are made up of funds utilizing all process groups, investment processes, asset classes, and geographic regions.
In tandem with other composite level indexes, the Offshore Composite Index saw no relief in Q4 as well. While outperforming broad market
indexes such as the MSCI World Index for both the quarter and YTD, the Index was certainly not immune to declines in equity markets and
acted as a muted version of equities.
15%
65%
20%Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
19
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Onshore wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 345
Domicile Onshore
Assets in Index (US$MM) 51,030
Currency USD
Other Index Information (Avg)
Management Fees 1.818
Incentive Fees 20
Advance Notice Time (days) 49.12
Lockup Period (months) 7.67
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Composite Onshore wMSCI -8.54% -7.07% -15.47% 3.13% 17.95%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.48% 5.90%
Downside Deviation 5.25% 4.78%
Sharpe Ratio -0.170 0.500
Sortino Ratio -0.210 0.620
Alpha (vs. MSCI World) 0.003 0.003
Beta (vs. MSCI World) 0.360 0.370
% Positive Months 61.11% 63.33%
R-squared (vs. MSCI World) 0.780 0.780
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Composite Onshore wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most hedge fund strategies. The index includes funds
domiciled in the US. Index performance is derived through equally weighting of funds returns. Morningstar's Composite Hedge Fund Indices
are made up of funds utilizing all process groups, investment processes, asset classes, and geographic regions.
In tandem with other composite level indexes, the Onshore Composite Index saw no relief in Q4 as well. While outperforming broad market
indexes such as the MSCI World Index for both the quarter and YTD, the Index was certainly not immune to declines in equity markets and
acted as a muted version of equities.
9% 86%
5%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
20
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Small Funds wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 515
Domicile ALL
Assets in Index (US$MM) 19,645
Currency USD
Other Index Information (Avg)
Management Fees 1.791
Incentive Fees 20
Advance Notice Time (days) 47.47
Lockup Period (months) 7.00
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Composite Small Funds wMSCI -9.21% -7.15% -17.24% 0.63% 15.66%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.74% 6.02%
Downside Deviation 5.52% 4.96%
Sharpe Ratio -0.210 0.380
Sortino Ratio -0.260 0.470
Alpha (vs. MSCI World) 0.003 0.002
Beta (vs. MSCI World) 0.380 0.390
% Positive Months 63.88% 65.00%
R-squared (vs. MSCI World) 0.820 0.820
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Composite Small Funds wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets smaller than $15MM, representing most hedge fund strategies. The index includes both
US and non-US domiciled funds. The index rate of return is the equally-weighted average of the net rates of return of each of the consituent
funds in the index. Morningstar's Composite Hedge Fund Indices are made up of funds utilizing all process groups, investment processes,
asset classes, and geographic regions.
The Smaller Funds Index has been outperformed by the broader HF Composite (EW) Index for both the quarter, 1 Yr, 3 Yr, and 5 Yr periods.
Nonetheless, these small hedge funds (less than $15 mm) weathered this past year's downturn far better than equity markets; in Q4 alone,
the Index returned -7.15% versus the MSCI World Index's -21.77% and the S&P500's -21.94%.
12%
73%
15%Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
21
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Convertible Arbitrage wMSCIIndex Classification
Process Group Relative Value
Investment Process Arbitrage
Asset Class Convertibles
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date May-96
Consitituent Weighting Equal
Number of Funds in Index 19
Domicile ALL
Assets in Index (US$MM) 1,970
Currency USD
Other Index Information (Avg)
Management Fees 1.789
Incentive Fees 20
Advance Notice Time (days) 47.37
Lockup Period (months) 6.95
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Convertible Arbitrage wMSCI -17.12% -13.78% -29.92% -17.13% -18.74%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 10.70% 8.97%
Downside Deviation 9.81% 8.25%
Sharpe Ratio -0.780 -0.510
Sortino Ratio -0.860 -0.560
Alpha (vs. MSCI World) -0.001 -0.003
Beta (vs. MSCI World) 0.580 0.520
% Positive Months 66.66% 65.00%
R-squared (vs. MSCI World) 0.680 0.610
Growth of 1,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Convertible Arbitrage wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This process index is a subset of the Relative Value process group. It comprises funds greater than $15MM with both US and non-US
domicile. Index performance is derived through equally weighting fund returns. Convertible arbitrage strategies genearlly attempt to exploit
spread relationships between convertible securities and their corresponding stock through the use of short-selling and derivatives.
In late 2008, the Securities and Exchange Commission and Financial Services Authority banned the ability to short sell financial stocks. This
caused convertible arbitrage funds, which typically take long positions in convertible bonds hedged with short positions in the related stock,
to plunge. Although this index rebounded in December, it lost almost a third of its value during 2008.
0%
84%16%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
22
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Developed Markets wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography Developed Markets
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Asset
Number of Funds in Index 642
Domicile ALL
Assets in Index (US$MM) 144,184
Currency USD
Other Index Information (Avg)
Management Fees 1.812
Incentive Fees 20
Advance Notice Time (days) 48.71
Lockup Period (months) 7.50
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Developed Markets wMSCI -7.34% -5.33% -12.11% 3.85% 18.84%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 5.71% 5.13%
Downside Deviation 4.61% 4.15%
Sharpe Ratio -0.120 0.480
Sortino Ratio -0.150 0.600
Alpha (vs. MSCI World) 0.003 0.003
Beta (vs. MSCI World) 0.310 0.320
% Positive Months 61.11% 63.33%
R-squared (vs. MSCI World) 0.760 0.760
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Developed Markets wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This geographical area index comprises funds greater than $15MM with both US and non-US domiciles. Index performance is derived
through equally weighting fund returns. Developed markets strategies encompass Europe, North America, Japan, Pacific ex-Japan. This
index is made up of funds utilizing all process groups, investment processes, asset classes, and developed geographic regions.
The ability to hedge helped the Developed Markets Hedge Fund Index, which lost only 12.11% in 2008. Of the developed market equities
funds, those investing in European stocks fared the best on a relative basis.
0% 100%0%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
23
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Directional Trading wMSCI Index Classification
Process Group Directional Trading
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 188
Domicile ALL
Assets in Index (US$MM) 51,271
Currency USD
Other Index Information (Avg)
Management Fees 1.804
Incentive Fees 20
Advance Notice Time (days) 48.32
Lockup Period (months) 7.37
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Directional Trading wMSCI -5.88% 4.22% 3.51% 21.40% 34.13%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 5.60% 5.98%
Downside Deviation 4.05% 4.29%
Sharpe Ratio 0.580 0.710
Sortino Ratio 0.810 0.990
Alpha (vs. MSCI World) 0.006 0.005
Beta (vs. MSCI World) 0.100 0.140
% Positive Months 61.11% 61.66%
R-squared (vs. MSCI World) 0.080 0.120
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Directional Trading wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most directional trading strategies. The index includes
both US and non-US domicile. Index performance is derived through equally weighting of funds returns. Directional trading strategies are
based upon speculating on the direction of market prices of currencies, commodities, equity, and bonds in the futures and cash markets.
One of the best-performing strategies in 2008 was global trend following, a systematic strategy that tracks price trends in liquid derivatives
such as futures, options, and currency forwards. Although directional trading performance was hit hard by Q3 commodity price deflation, it
recovered in Q4 thanks to the drop in oil and the continued rise in the US Dollar.
21%
73%
6%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
24
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Distressed Securities wMSCI Index Classification
Process Group Specialist Credit
Investment Process Distressed Securities
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Feb-96
Consitituent Weighting Equal
Number of Funds in Index 22
Domicile ALL
Assets in Index (US$MM) 20,081
Currency USD
Other Index Information (Avg)
Management Fees 1.905
Incentive Fees 20
Advance Notice Time (days) 54.29
Lockup Period (months) 9.71
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Distressed Securities wMSCI -9.24% -18.21% -26.68% -4.49% 25.75%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 8.38% 7.82%
Downside Deviation 7.41% 6.77%
Sharpe Ratio -0.260 0.790
Sortino Ratio -0.290 0.920
Alpha (vs. MSCI World) 0.002 0.004
Beta (vs. MSCI World) 0.440 0.450
% Positive Months 66.66% 73.33%
R-squared (vs. MSCI World) 0.660 0.650
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Distressed Securities wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This process index is a subset of the Specialist Credit process group. It comprises funds greater than $15MM with both US and non-US
domicile. Index performance is derived through equally weighting fund returns. Distressed securities strategies invest in companies
suffering financial distress. They seek capital appreciation and do not focus on the high-yield nature of the assets.
With the record level of high-yield defaults in Q4, hedge funds buying distressed sercurities early in the credit crunch saw their investments
deteriorate even further alongside the economy. This index has the highest average lockup period of 9.71 months and investors of distressed
assets felt this lack of liquidity in Q4 and throughout 2008.
23%
72%5%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
25
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Emerging Markets wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography Emerging Markets
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-97
Consitituent Weighting Equal
Number of Funds in Index 99
Domicile ALL
Assets in Index (US$MM) 13,345
Currency USD
Other Index Information (Avg)
Management Fees 1.761
Incentive Fees 20
Advance Notice Time (days) 45.64
Lockup Period (months) 6.26
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Emerging Markets wMSCI -15.78% -15.07% -33.37% -7.61% 18.05%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 11.33% 9.83%
Downside Deviation 9.48% 8.39%
Sharpe Ratio -0.190 0.420
Sortino Ratio -0.230 0.500
Alpha (vs. MSCI World) 0.002 0.003
Beta (vs. MSCI World) 0.620 0.620
% Positive Months 63.88% 70.00%
R-squared (vs. MSCI World) 0.750 0.740
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
3,000
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Emerging Markets wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This geographical area index comprises funds greater than $15MM with both US and non-US domiciles. Index performance is derived
through equally weighting fund returns. Emerging markets strategies encompass parts of Europe, Middle East and Africa (EMEA), Asia
Pacific, and Latin America. This index is made up of funds utilizing all process groups, investment processes, asset classes, and emerging
geographic regions.
Emerging market equities proved to be among the worst strategies in 2008. Effectively a market-return strategy, these funds are only able to
invest in stocks or hold cash, as shorting emerging markets holdings is very difficult. Emerging stock markets performed worse than other
markets, as skittish investors pulled capital out of risky assets.
0%
0%
100%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
26
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Equity wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class Equity
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 518
Domicile ALL
Assets in Index (US$MM) 66,050
Currency USD
Other Index Information (Avg)
Management Fees 1.789
Incentive Fees 20
Advance Notice Time (days) 47.32
Lockup Period (months) 6.93
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Equity wMSCI -10.37% -8.79% -21.81% -2.22% 15.71%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 8.12% 7.09%
Downside Deviation 6.73% 5.95%
Sharpe Ratio -0.200 0.320
Sortino Ratio -0.240 0.390
Alpha (vs. MSCI World) 0.002 0.002
Beta (vs. MSCI World) 0.470 0.470
% Positive Months 63.88% 66.66%
R-squared (vs. MSCI World) 0.830 0.830
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Equity wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This asset class index comprises funds greater than $15MM with both US and non-US domiciles. Index performance is derived through
equally weighting fund returns. Equity is defined as equity securities and derivatives thereof; these include common shares, preferred shares,
ADRs, GDRs, contracts for differences, share options, equity index futures and options.
Equity markets offered little escape in 2008 as leverage destroyed equity values and stocks fell past book value to near zero. Though dips in
the stock market are traditionally opportunities to buy, every dip since 2007 has been followed by another. Every time the market looked
ready to bottom out, it sunk further, leaving equity strategies with nowhere to turn.
11%
76%
13%Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
27
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Europe wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography Europe
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Feb-98
Consitituent Weighting Equal
Number of Funds in Index 112
Domicile ALL
Assets in Index (US$MM) 13,429
Currency USD
Other Index Information (Avg)
Management Fees 1.757
Incentive Fees 20
Advance Notice Time (days) 45.43
Lockup Period (months) 6.17
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Europe wMSCI -6.95% -3.20% -11.54% 4.49% 24.03%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.08% 5.20%
Downside Deviation 4.98% 4.24%
Sharpe Ratio 0.060 0.400
Sortino Ratio 0.070 0.490
Alpha (vs. MSCI World) 0.003 0.004
Beta (vs. MSCI World) 0.300 0.300
% Positive Months 63.88% 65.00%
R-squared (vs. MSCI World) 0.630 0.600
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Europe wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This region index is a subset of the Developed Markets geographical area. It comprises funds greater than $15MM with both US and non-US
domiciles. Index performance is derived through equally weighting fund returns. Europe strategies invest at least 80% of their assets in the
developed European markets. This index contains all process groups, investment processes, and asset classes.
The Morningstar Europe Equity Hedge Fund Index beat the MSCI Europe Index by nearly 30 percentage points in 2008. Late in the year,
European hedge funds got some relief, as governments announced rate cuts and stimulus packages, boosting the equity markets.
0% 100%
0%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
28
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Event-Driven wMSCI Index Classification
Process Group Multi Process Group
Investment Process Event Driven
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 27
Domicile ALL
Assets in Index (US$MM) 2,925
Currency USD
Other Index Information (Avg)
Management Fees 1.778
Incentive Fees 20
Advance Notice Time (days) 46.67
Lockup Period (months) 6.67
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Event-Driven wMSCI -7.83% -6.64% -16.38% 1.15% 21.90%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 7.11% 6.63%
Downside Deviation 5.84% 5.41%
Sharpe Ratio -0.240 0.640
Sortino Ratio -0.300 0.790
Alpha (vs. MSCI World) 0.003 0.003
Beta (vs. MSCI World) 0.380 0.400
% Positive Months 63.88% 68.33%
R-squared (vs. MSCI World) 0.730 0.730
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Event-Driven wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This process index is a subset of the Multi-Process group. It comprises funds greater than $15MM with both US and non-US domiciles.
Index performance is derived through equally weighting fund returns. Event driven strategies encompass a combination of investment
processes targeting securities which experience a change in valuation due to corporate transactions. Investors of these value-seeking funds
look for events such as privatizations, mergers and acquisitions, share repurchases, IPOs, and spin-offs to enhance share value.
2008 witnessed the collapse of a record number of merger and acquisition deals and a 50% drop in IPO activity. Scarce corporate
transactions in developed markets led to this index's -16.38% 2008 performance.
0%
96%4%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
29
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Fixed-Income wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class Fixed Income
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date May-94
Consitituent Weighting Equal
Number of Funds in Index 94
Domicile ALL
Assets in Index (US$MM) 35,859
Currency USD
Other Index Information (Avg)
Management Fees 1.826
Incentive Fees 20
Advance Notice Time (days) 49.57
Lockup Period (months) 7.83
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Fixed-Income wMSCI -7.09% -12.01% -20.08% -6.95% 10.28%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.36% 5.61%
Downside Deviation 5.81% 5.11%
Sharpe Ratio -0.570 0.290
Sortino Ratio -0.630 0.320
Alpha (vs. MSCI World) 0.000 0.002
Beta (vs. MSCI World) 0.370 0.350
% Positive Months 63.88% 73.33%
R-squared (vs. MSCI World) 0.790 0.740
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Fixed Income wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This asset class index comprises funds greater than $15MM with both US and non-US domiciles. Index performance is derived through
equally weighting fund returns. Fixed income includes bonds, money-market instruments, and other debt of sovereign bonds, government-
sponsored, investment grade, and high yield corporates, asset-backed and mortgage-backed securities, as well as options and futures.
In 2008, investors fled to Treasuries, casuing credit spreads to widen to near-Depression levels in even investment-grade corporate bonds.
Defaults on high-yield instruments rose to a record high in November, thereby squeezing the prices of high-yield securities and sending this
index down 12% for the 4th quarter and 20.08% for the year.
24%
66%
10%Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
30
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Multi-Process Group wMSCI Index Classification
Process Group Multi Process Group
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 87
Domicile ALL
Assets in Index (US$MM) 12,926
Currency USD
Other Index Information (Avg)
Management Fees 1.792
Incentive Fees 20
Advance Notice Time (days) 47.50
Lockup Period (months) 7.00
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Multi-Process Group wMSCI -10.21% -8.17% -19.56% -1.14% 17.55%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.95% 6.15%
Downside Deviation 5.85% 5.22%
Sharpe Ratio -0.260 0.470
Sortino Ratio -0.310 0.550
Alpha (vs. MSCI World) 0.002 0.003
Beta (vs. MSCI World) 0.390 0.390
% Positive Months 63.88% 68.33%
R-squared (vs. MSCI World) 0.770 0.770
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Multi-Process Group wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This index comprises funds with assets greater than $15MM. The index includes both US and non-US domicile. Index performance is
derived through equal weighting of funds returns. Multi-process group funds practice a strategy whereby a single investment process does
not account for more than 80% of their risk capital. Although gradual shifts may occur over time in response to economic or market trends,
these funds tend to have relatively stable allocations to a combination of processes, e.g. 50% arbitrage and 50% statistical arbitrage
The hedge fund industry began 2008 with high leverage and exposure. As a result, the ensuing losses in global financial markets were
devastating to most strategies (global trend and CTAs excepted). Although this index's investment processes correlate differently, it did not
experience the benefits of diversification.
13%
66%
21% Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
31
Morningstar Hedge Fund Indices Global SummaryMorningstar HF North America wMSCI Index Classification
Process Group ALL
Investment Process ALL
Asset Class ALL
Geography North America
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 293
Domicile ALL
Assets in Index (US$MM) 62,567
Currency USD
Other Index Information (Avg)
Management Fees 1.842
Incentive Fees 20
Advance Notice Time (days) 50.52
Lockup Period (months) 8.21
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF North America wMSCI -8.71% -10.19% -18.74% -2.54% 11.62%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 7.08% 6.31%
Downside Deviation 5.97% 5.32%
Sharpe Ratio -0.370 0.300
Sortino Ratio -0.440 0.350
Alpha (vs. MSCI World) 0.002 0.002
Beta (vs. MSCI World) 0.410 0.420
% Positive Months 61.11% 63.33%
R-squared (vs. MSCI World) 0.850 0.850
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF North America wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This region index is a subset of the developed markets geographical area. It comprises funds greater than $15MM with both US and non-US
domiciles. Index performance is derived through equally weighting fund returns. North America strategies invest at least 80% of their assets
in the developed North American markets. This index contains funds utilizing all process groups, investment processes, and asset classes.
Although this North American hedge fund index was down 10.19% for Q4 and 18.84% for the year, it fared better than the overall developed
American equity markets.
0% 100%0%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
32
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Relative Value wMSCI Index Classification
Process Group Relative Value
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Jan-94
Consitituent Weighting Equal
Number of Funds in Index 126
Domicile ALL
Assets in Index (US$MM) 31,766
Currency USD
Other Index Information (Avg)
Management Fees 1.774
Incentive Fees 20
Advance Notice Time (days) 46.45
Lockup Period (months) 6.58
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Relative Value wMSCI -7.72% -6.66% -14.68% -0.60% 5.16%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 5.46% 4.55%
Downside Deviation 4.94% 4.14%
Sharpe Ratio -0.530 -0.190
Sortino Ratio -0.590 -0.200
Alpha (vs. MSCI World) 0.002 0.001
Beta (vs. MSCI World) 0.320 0.290
% Positive Months 69.44% 66.66%
R-squared (vs. MSCI World) 0.790 0.730
Growth of 1,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Relative Value wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most relative value strategies. The index includes both
US and non-US domicile. Index performance is derived through equal weighting of fund returns. Relative value strategies focus on spread
relationships between pricing components of financial assets or commodities. They seek to avoid assuming any outright market risk,
although spread risk may be significant.
Relative value strategies took a big fall in 2008 as extreme market volatility coupled with massive de-leveraging led to forced selling,
significant redemption pressures, and a general shortage of liquidity. Short selling bans and margin requirements combined to make the
strategy all but untenable.
4%
83%
13%Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
33
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Specialist Credit wMSCIIndex Classification
Process Group Specialist Credit
Investment Process ALL
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date Aug-95
Consitituent Weighting Equal
Number of Funds in Index 65
Domicile ALL
Assets in Index (US$MM) 2,882
Currency USD
Other Index Information (Avg)
Management Fees 1.836
Incentive Fees 20
Advance Notice Time (days) 50.16
Lockup Period (months) 8.06
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Specialist Credit wMSCI -7.33% -15.03% -22.16% -5.77% 14.76%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 6.83% 6.26%
Downside Deviation 6.04% 5.47%
Sharpe Ratio -0.450 0.540
Sortino Ratio -0.510 0.620
Alpha (vs. MSCI World) 0.001 0.002
Beta (vs. MSCI World) 0.370 0.360
% Positive Months 61.11% 71.66%
R-squared (vs. MSCI World) 0.690 0.670
Growth of 1,000
0
500
1,000
1,500
2,000
2,500
3,000
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Specialist Credit wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This composite index comprises funds with assets greater than $15MM, representing most specialist credit strategies. The index includes both
US and non-US domicile. Index performance is derived through equal weighting of fund returns. Specialist credit managers seek to lend to
credit-sensitive issuers. The investment edge comes from the manager's ability to perform a high level of due diligence and to take advantage
of what the manager discerns to be relatively inexpensive securities. The securities may be inexpensive due to regulatory anomalies or other
constrains on traditional lenders.
This index's poor performance for Q4 and 2008 was primarily attributed to long/short credit and distressed securities, two investment
processes that were hit unusually hard with the weathering world economy.
9%60%
31%
Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
34
Morningstar Hedge Fund Indices Global SummaryMorningstar HF Statistical Arbitrage wMSCIIndex Classification
Process Group Relative Value
Investment Process Statistical Arbitrage
Asset Class ALL
Geography ALL
Industry Bias N/A
Capitalization Focus N/A
Basic Index Information
Start Date May-97
Consitituent Weighting Equal
Number of Funds in Index 23
Domicile ALL
Assets in Index (US$MM) 2,785
Currency USD
Other Index Information (Avg)
Management Fees 1.725
Incentive Fees 20
Advance Notice Time (days) 43.50
Lockup Period (months) 5.40
Index Description
Returns (Net of Fees)
Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr
Morningstar HF Statistical Arbitrage wMSCI 0.73% 1.44% -6.20% 3.96% 13.15%
MSCI World Index (USD) Net Index -15.25% -21.77% -43.29% -23.13% 0.37%
MSCI EAFE (USD) Net Official Index -20.56% -19.95% -47.79% -21.49% 10.41%
Barclays U.S. Aggregate Bond Index -3.83% 5.25% -1.63% 16.31% 24.14%
LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%
Index Commentary
Statistical Summary 3-Yr 5-Yr Index Composition
Standard Deviation 4.08% 3.50%
Downside Deviation 3.56% 3.01%
Sharpe Ratio -0.290 -0.110
Sortino Ratio -0.330 -0.130
Alpha (vs. MSCI World) 0.002 0.002
Beta (vs. MSCI World) 0.140 0.130
% Positive Months 69.44% 75.00%
R-squared (vs. MSCI World) 0.260 0.250
Growth of 1,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Morningstar HF Statistical Arbitrage wMSCI
Barclays U.S. Aggregate Bond Index
MSCI World Index (USD) Net Index
This process index is a subset of the Relative Value process group. It comprises funds greater than $15MM with both US and non-US
domicile. Index performance is derived through equally weighting fund returns. Statistical arbitrage strategies use systematic models to
build long and short portfolios with different current prices that the market is statistically predicted to price equivalently.
Statistical Arbitrage was among the top performers with returns of 1.44% and -6.20% for Q4 and 2008 respectively. Also, this Index's Q4 net
asset flow was a mere $22MM, and when compared to the average process group's outflow of $1.4BN, it is clear that investors maintained
confidence in statistical arbitrage.
9%
91%
0%Developed Constituents
Emerging Constituents
Global Constituents
February 2009 Morningstar Hedge Fund Indices with MSCI Methodology
Compiled using data as of December 31, 2008
Please refer to the Notice at the end of this document.
35
Notice - Data Biases
Due to the private nature of the hedge fund industry, hedge fund data is subject to a number of biases:
Selection bias – Some hedge funds may choose not to participate in a fund database, or may select when they want to participate. Hedge funds
with particular size or performance characteristics may be more willing to participate.
Survivorship bias – The database was constructed in 2004 and does not include hedge funds that ceased operations before that time. Therefore,
historical returns may be overstated and historical risk may be understated for time periods before 2004. Going forward, any performance
information for a hedge fund that has ceased operations will continue to be included in the database.
###
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an
extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides
data on more than 290,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 19
countries and minority ownership positions in companies based in three other countries.
As announced in September 2008, Morningstar is also now calculating hedge fund indexes by applying the MSCI Hedge Fund Index Methodology
and Hedge Fund Classification Standard to Morningstar’s hedge fund database. These indexes demonstrate the performance of hedge funds to
investors who have hedged their currency exposure back into U.S. dollars. The MSCI Hedge Fund Index Methodology classifies hedge funds by
investment process, geography, and asset class.
The Morningstar Hedge Fund Database features approximately 11,500 investments, including nearly 8,300 active funds and 3,100 dead funds for
research purposes. Up to 300 data points, including information on investment strategy, portfolio holdings, and hedging techniques, are used to
sort each fund into a strategy category for peer group analysis purposes.