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Many wealthy not attracted to hedge funds

Date: Thursday, March 29, 2007
Author: CNN Money

Only 1 in 5 affluent U.S. investors understands hedge funds, suggesting the industry needs better marketing.

NEW YORK (Reuters) -- Only one in five affluent U.S. investors understands hedge funds and other kinds of "alternative investments," according to a survey released Wednesday that suggests the industry needs better marketing.

The survey by Chicago-based consultants Spectrem Group also found that only 9 percent of affluent investors are interested in hedge funds. The survey polled 514 affluent U.S. households, defined as those with at least $500,000 in investable assets.

The Spectrem survey, even though it comprises a small sampling, suggests that hedge funds have some work to do if they want to continue to attract more wealthy investors, which historically have constituted the largest percentage of industry investment.

"Financial services providers need to be proactive in educating affluent investors about their risks and rewards," said Spectrem in the report.

Hedge funds, which are lightly regulated private pools that invest in myriad strategies, continue to attract resilient interest from institutional investors looking for consistent above-market returns, even though a majority fail to achieve that goal.

But wealthy individuals and family offices have been the primary investors in hedge funds for decades, accounting for some 40 percent of the industry's estimated $1.4 trillion in capital, according to industry tracker Greenwich Associates.

It's no surprise that hedge funds are not understood and are viewed with suspicion by many affluent investors, particularly after a number of high-profile blowups, including those by Amaranth Advisors and Bayou Group, experts said.

Hedge funds have a reputation for secrecy and often rapidly trade complex strategies that employ leverage and derivatives across a range of securities. In addition, they typically charge fees as high as 20 percent or more of profits.

"Historically, hedge funds were the primary domain of high net worth investors, but the biggest group were Europeans," said Daniel Celeghin of Casey, Quirk & Associates, a Darien, Connecticut-based strategy consultancy for hedge and other funds. "American high net worth investors are a significant group but they are relative latecomers."

But hedge funds "ignore the high net worth market at their peril," Celeghin said. "It remains the most significant group in hedge funds."

The study findings suggest a divide between relatively affluent investors, who typically might buy hedge funds through their brokers, and ultrahigh net worth family offices, which may have millions of dollars to invest and typically hire consultants or have staff members paid to understand hedge funds.

Ultrawealthy investors have been in hedge funds for years, but now more relatively affluent investors are being targeted as prospective investors by both brokers and funds themselves, experts say.