Hedge Fund Indices - Morningstar,...

February 2009 Morningstar Hedge Fund Indices with MSCI Methodology

Hedge Fund Indices

Global Summary

Fourth Quarter 2008 Report

Published February 2009


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




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.)




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




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





Small Funds wMSCI


Core Funds wMSCI




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




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.




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.




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


Event-Driven

Multi-Process


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.




8

Performance Comparison between Best and Worst Performing Strategy Indices Since 2004

Distressed Securities Systematic Trading

Long Bias

Long Bias



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.




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




10

Strategy Index Correlation Matrix Since 2000

Arbitrage

Discrectionary Trading


Event-Driven

Long Bias

Long-Short Credit

Merger Arbitrage

Multi-Process Group

No Bias

Short Bias


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




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


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


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


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




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


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


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


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




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


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


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


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




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


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


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




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



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




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



Start Date Jan-94

Consitituent Weighting Asset


Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary




Sharpe Ratio 0.020 0.590

Sortino Ratio 0.030 0.720





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




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


Global Constituents




17

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Equally Weighted wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary




Sharpe Ratio -0.140 0.440

Sortino Ratio -0.170 0.530





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




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%



Global Constituents




18

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Offshore wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile Offshore


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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


Global Constituents




19

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Onshore wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile Onshore


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




20

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Composite Small Funds wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




21

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Convertible Arbitrage wMSCIIndex Classification


Investment Process Arbitrage

Asset Class Convertibles

Geography ALL

Industry Bias N/A



Start Date May-96



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary






Alpha (vs. MSCI World) -0.001 -0.003




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



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%



Global Constituents




22

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Developed Markets wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography Developed Markets

Industry Bias N/A



Start Date Jan-94

Consitituent Weighting Asset


Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




23

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Directional Trading wMSCI Index Classification

Process Group Directional Trading


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




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



Start Date Feb-96



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




25

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Emerging Markets wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography Emerging Markets

Industry Bias N/A



Start Date Jan-97



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




26

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Equity wMSCI Index Classification

Process Group ALL


Asset Class Equity

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr

Morningstar HF Equity wMSCI -10.37% -8.79% -21.81% -2.22% 15.71%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




27

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Europe wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography Europe

Industry Bias N/A



Start Date Feb-98



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


Q3 2008 Q4 2008 1 Yr 3 Yr 5 Yr

Morningstar HF Europe wMSCI -6.95% -3.20% -11.54% 4.49% 24.03%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




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



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




29

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Fixed-Income wMSCI Index Classification

Process Group ALL


Asset Class Fixed Income

Geography ALL

Industry Bias N/A



Start Date May-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




30

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Multi-Process Group wMSCI Index Classification

Process Group Multi Process Group


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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


Global Constituents




31

Morningstar Hedge Fund Indices Global SummaryMorningstar HF North America wMSCI Index Classification

Process Group ALL


Asset Class ALL

Geography North America

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




32

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Relative Value wMSCI Index Classification



Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Jan-94



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




33

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Specialist Credit wMSCIIndex Classification

Process Group Specialist Credit


Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date Aug-95



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




34

Morningstar Hedge Fund Indices Global SummaryMorningstar HF Statistical Arbitrage wMSCIIndex Classification


Investment Process Statistical Arbitrage

Asset Class ALL

Geography ALL

Industry Bias N/A



Start Date May-97



Domicile ALL


Currency USD



Incentive Fees 20



Index Description


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%




LIBOR Index 0.73% 0.41% 2.88% 13.78% 19.24%

Index Commentary










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



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%



Global Constituents




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.

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