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Wealthy say no better at finding top hedge funds

Date: Wednesday, April 25, 2007
Author: Svea Herbst-Bayliss, Reuters

BOSTON (Reuters) - Wealthy investors say they are no better than anyone else at finding the world's best hedge funds, loosely regulated portfolios that can enrich the people who run them and those who invest in them.

Three out of four wealthy investors polled by U.S. Trust, a company that has served high net-worth families for over 150 years, said hedge funds are difficult to investigate and that it is difficult to find a good fund.

The red-hot $1.5 trillion hedge fund industry has long been called an exclusive playground for the rich, who can afford to commit $1 million or more.

But a huge bank account alone is no help in identifying potential winners after hedge fund assets have more than doubled in three years and hundreds of new managers have set up funds every year, according to the survey released on Tuesday.

"These people earned their money, and they now hate to lose it," Paul Napoli, U.S. Trust's vice chairman, told Reuters. Even wealthy investors are daunted by hedge funds' high minimum investments, high fees and lack of information on how the money is invested, he said.

Last year the average hedge fund returned roughly 13 percent, only slightly more than the average stock mutual fund, and significantly less than the 317 percent gain John Arnold's Centaurus fund delivered to its investors.

Other managers such as Boone Pickens, James Simons, Edward Lampert and Steve Cohen also had good years as each man took home at least $1 billion and their investors were similarly handsomely rewarded.

But last year also marked the biggest ever hedge fund collapse when soured natural gas bets helped sink Amaranth Advisors.

Napoli said wealthy investors also want hedge funds to help diversify their portfolios, with half of the respondents saying that hedge funds offer strong returns.

"We are seeing a real sea change in attitude about hedge funds," Napoli said in a telephone interview, adding that "the respondents want funds that truly hedge."

That might be especially important at a time investors are also becoming more nervous about the power and safety of U.S. markets, with three out of four people saying the superpower is losing its competitive edge in the world economy.

Half of the respondents said the U.S. stock market is becoming riskier, and a significant number of those people said they plan to move money abroad.

"Previously people owned stocks, bonds and real estate, and now that is changing," Napoli said, adding "People want to preserve their wealth by diversifying."

The survey also found that respondents said their children are generally at least 27 years old -- nearly 10 years older than when they begin voting and driving -- before they manage their own money.