A Hedge Fund Scandal Stings M*
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Monday, September 10, 2012

A Hedge Fund Scandal Stings M*

The Morningstar team is struggling to wash away the stain of a hedge fund scandal. Chuck Jaffe of MarketWatch reports that the Chicago-based mutual fund ratings specialists failed last week to dismiss a lawsuit over the collapse of Robert Stinson's Life's Good STABL Mortgage Fund.

Unlike with mutual funds, Morningstar only rates hedge funds that choose to be rated. In the case of Stinson, whom MarketWatch describes as absconding with about $17 million from 150 investors, Morningstar even rated his fund five stars based on self-reported performance data that turned out to be fabricated.

Despite the setback last week, Jaffe expects that Morningstar will win the suit because "Morningstar has not responsibility to uncover fraud" and the self-reported nature of the performance data is fully-disclosed. Yet the columnist uses this suit to remind mutual fund investors that they should never rely 100 percent on ratings.

"Ratings measure the past," Jaffe writes. "They are built to act as a filter, to winnow thousands of choices down to an appropriate few, at which point an investor's judgment, style and intuition should take over."

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