Hedge funds are back in the news again. And some people have a new idea: why not create a rating system for hedge funds, like we already have for mutual funds?

On the surface, it seems like a great idea. Hedge funds are mysterious investment vehicles, conducting risky and complex trades in order to achieve their aims of giving high rates of return to mostly rich investors. Many fail, as we learned with the recent Bayou scandal. Wouldn't it be super if investors had a rating system to guide them to well managed and well performing funds, and help steer them away from the stinkers?

Yes, it would be super. But it wouldn't work. Mutual funds are heavily regulated, work according to similar investment strategies (i.e., usually investing in equities and bonds) and are required to state their returns, fees, and other information on a regular basis.

Hedge funds operate to a completely different set of rules. They are not regulated (except for a newly proposed rule which require managers to register with the SEC) and are under no obligation to state their returns to anyone. And it is not easy to compare them, owing to radically different and complex investment strategies.

But there are people out there who want to create a hedge funds rating system. Morningstar, the company which has a mutual funds rating system, is giving it a shot. Critics, however, point out that these systems depend on hedge funds voluntarily disclosing their returns, or what they claim are their returns. Additionally, potential ratings firms might be reluctant to give a bad rating to a poorly performing hedge fund, fearing that the fund may stop reporting results, which would call into question the accuracy and impartiality of the system.

Stay tuned, this is a hot area in investment circles, which deserves more scrutiny ...mortgage calculator