Compensation Scheme Masquerading as An Asset Class

From the article "Hedge Funds: Where Did That One-Star Fund Go?" (HT: EC)

Morningstar certainly selected a lively date to launch its initial batch of Morningstar Ratings for hedge funds*: January 2008. One year later, hedge funds had suffered their worst 12-month performance in forever, dropping more than 20% in aggregate and spurring a wave of investor redemptions.

In response, hedge funds did what hedge funds do best–they quit. Folded shop, returned what assets remained, expired. They became ex-hedge funds. Either that, or they crawled into a cave to lick their wounds, continuing to exist but ceasing to be seen in daylight by refusing to update their performances in public databases such as Morningstar’s. All in all, of the 1,732 single-strategy hedge funds that received a rating from Morningstar during the March 2008 launch, a whopping 615 funds–36%!–disappeared over the ensuing 12 months.