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Morningstar's 2014 Alternatives Fund Manager of the Year Nominees

These alternatives managers did more with less.

Mentioned: , , , , , ,

Today we announce the final group of nominees for Morningstar's Fund Manager of the Year awards. The winners of all five categories--Domestic Equity, International Equity, Fixed-Income, Allocation, and Alternatives--will be announced on Jan. 21.

Morningstar's three candidates for Alternatives Fund Manager of the Year did more with less. And by "less," I mean less market exposure than their long-only equity compatriots. Most alternative funds hedge away some portion of market risk, resulting in lower betas than traditional stock funds, which usually have betas near 1.0 or higher. In contrast, the three nominees for Alternatives Fund Manager of the Year had betas in 2014 ranging from 0.11 (in other words, systematic market exposure of virtually nil) to 0.63. Thus, even though these funds' absolute returns may appear weak relative to the S&P 500, to generate positive returns their managers had to generate a higher share of alpha, or pure stock-selection skill (and potentially on the short side as well as the long side of the portfolio). While a fund's returns relative to its peers and benchmarks was an important factor in considering nominees, equally important when evaluating alternative managers are their risk-adjusted returns and alpha generation.

Josh Charlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.