Chicago-based research firm Morningstar which is, arguably, the bible on mutual fund information, may have to retool the way it covers alternative mutual funds, as it's getting flooded by new launches in the space. There were about 64 new fund entrants last year and 52 the year prior, bringing the total listed alternative mutual funds in the database to over 400.

All mutual funds are eligible for being included in the database, though only three-year old ones can get quantitative star ratings. Morningstar already issues qualitative reports on younger funds, but the firm may have to get selective about which ones it will cover. Josh Charlson, Morningstar's new head of alternative funds research, said that given the sheer number of new alternative funds, Morningstar may have to develop a strategy for which ones it will cover comprehensively.

"Some of these funds have grown so large so fast that we may have to change the way we go about this," he said, explaining that Mornignstar may have to limit its analyst coverage to the bigger, more well-known firms.

He declined to elaborate on how the firm might alter its approach, but people familiar with Morningstar say it could set an asset-size minimum for some of the strategies.

Morningstar's Charlson took over the alternative research role last month, replacing Nadia Papagiannis, who joined Goldman Sachs Asset Management as director of alternative strategy in the firm's global third party distribution business in January. Charlson was previously a strategist on Morningstar's fund-of-funds research team.

Some of the new alternative funds just launched in the past year or two came straight out of the gate with large chunks of money. The Blackstone Alternative Multi Manager I fund, which was launched in August, is now managing $1.2 billion, the Arden Alternative Strategies I fund, which came out in Nov., 2012, is overseeing $1.1 billion and the Neuberger Berman Absolute Return Manager A fund, which was launched in May, 2012, is handling $1.2 billion, to name a few.

Research professionals at wealth management firms are weighing the same question and say they approach these funds on a case by case basis. Beverley Sharp, the global head of retail research at Mercer Wealth Management in London, said Mercer will normally take into account the managers' past experience in overseeing similar funds. "We have never required managers to have a three-year track record, we have always taken past track records into account," she said.

Mercer, which does asset and wealth management and consulting for a range of institutional and retail clients, approaches all research this way. "It's nothing special in liquid alts space," said Simon Fox, Mercer's head of alternative research.

"We're trying to work out whether the manager will be able to add value on a very qualitative, forward-looking basis, where we'll look at the managers' experience in prior firms or related products," he added.

Ray Joseph, head of investment management research at UBS Wealth Management, said the firm rolled out a liquid alternatives model as part of an asset allocation plan for financial advisors at the end of 2012. And as a part of that model, UBS does usually suggest a longer track record for alternative mutual funds, but will still look at ones that came from a similar strategy with a longer life span.

Though he noted that UBS generally believes asset allocation modeling, not manager selection, will drive returns.

"Our biggest concern is helping advisors use [alternative mutual funds] properly. Cherry picking individual strategies or individual funds is not helping," he said. "We think it's about a model approach targeted towards a specific need for the client." 

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