Getting Out of Hedge Funds

Date: Saturday, April 21, 2007
Author: Paul B. Brown, The New York Times

WHEN it comes to hedge funds, do the extremely rich know more than the rest of us?

While institutions are increasing their holdings in hedge funds — and some of the largest hedge funds are planning to sell shares to an eagerly awaiting public — the wealthiest Americans have been bailing out, Bloomberg Markets reports.

“Americans with a net worth of at least $25 million, excluding the value of their primary homes, reduced their exposure to hedge funds in 2006,” Jenny Strasburg writes, citing research by the Spectrem Group, a consulting firm that specializes in retirement savings and investing by the affluent.

Some 38 percent of the wealthy investors surveyed had money in hedge funds in 2005. That number fell to 27 percent last year, and the amount of money that wealthy investors had in hedge funds fell by an even greater percentage. The average balance, which was $2.8 million in 2005, was just $1.6 million last year, a 43 percent decline.

“What some individuals say is that hedge funds have become too risky, and it’s unclear to them where the returns are being generated,” said George H. Walper Jr., president of Spectrem.

MANIC MONEY The traditional wisdom is that you do not want to invest in a mutual fund that trades frequently, because each trade adds a commission, which is deducted from potential returns. That is one main reason that most financial experts recommend a buy-and-hold investment approach.

“But some overlooked research from the University of Maryland notes a surprising exception,” Janet Paskin writes in Smart Money. “Funds with the highest turnover, that is, managers who trade more than 150 percent of their portfolio a year, do better than their slowpoke peers by about two percentage points a year.”

These funds overcome the higher costs they incur by following specific strategies — like momentum investing — and make large sector bets.

But in addition to higher trading costs, high-turnover funds have another drawback — potentially higher tax bills for investors. One potential way around the problem is to keep these funds in an individual retirement account or another tax-advantaged account.

GOING GREEN The commercial real estate sector is hot, but “sustainable construction” that is environmentally conscious is even hotter, Walecia Konrad writes in Fast Company.

An estimated 5 percent of all new construction received certification from the U.S. Green Building Council last year, and within three years 10 percent of all new commercial construction is expected to be sustainable.

The easiest way to invest in this phenomenon is, of course, through real estate investment trusts that are committed to buying new or renovated green buildings.

But as Ms. Konrad notes, two of the greenest REITs have been acquired: Arden Realty by GE Real Estate and Equity Office Properties by the Blackstone Group.

One REIT she singled out for investment is Liberty Property Trust, which is expected to increase the number of green properties it owns.

GOING ORGANIC “African-Americans are more likely to be dedicated buyers of organic foods than their white counterparts,” Black Enterprise reports.

Citing research by the Hartman Group, a health-and-wellness research and consulting firm, Brenda Porter writes that “African-Americans are 24 percent more likely to be core organic consumers than members of the general population.” She adds that “the findings debunk the myth that only educated whites with high incomes are purchasing these pricier items.”

FINAL TAKE It is difficult to grasp a concept as complex as environmental degradation/protection. In anticipation of Earth Day, which is tomorrow, Glamour breaks the issue into bite-size pieces.

The examples include: “10 times as much energy is wasted when you use a computer screen saver instead of using sleep mode”; three-quarters of the electricity used to power a television is used when it is plugged in but not turned on; and “14 plastic grocery bags contain enough petroleum to fuel a car for a mile.”