Ultrawealthy group to increase hedge fund investments

Date: Tuesday, December 11, 2007
Author: Cjar;es Paikert, Investment News.com

Despite the market's current volatility, the love affair between ultrawealthy investors and hedge funds is still torrid, according to a new survey by the Institute for Private Investors, a New York-based association for very wealthy families and their advisers.

Ultrawealthy individuals are generally considered to be those with at least $50 million in investible assets.

Nearly one-third of IPI members surveyed in the organization's annual family performance tracking study said they would put more money into hedge funds or a fund of funds next year.

Last year, the average allocation for an IPI member in a hedge fund was 24%, up more than 80% from the amount in 1999, said IPI director Kristi Kuechler, who is based in San Francisco.

"That's quite stunning," she said. "It's the opposite of a reassessment," Ms. Kuechler said, referring to the climate in the market.

Furthermore, 75% of surveyed IPI members said they considered hedge funds to be risk-reducing investments.

"That's not what they thought 10 years ago," Ms. Kuechler said.

"Then, they saw [hedge funds] as alpha," she said. "Now they believe the funds act as bond proxies."

Shortly after wealthy investors began to allocate more money to hedge funds and other alternative investments in 2000, they cut back on fixed-income investments, "traditionally used to dampen portfolio volatility," according to a recently released white paper by Maplewood, N.J.-based IPI consultant Jeffrey Evans.

Now, he wrote, "they appear to rely on alternatives to play that role."

Asked why she thought wealthy investors would consider hedge funds to be safe investments, Ms. Kuechler cited hedge fund marketing to institutions and investments that, she said, have clearly been successful.

The high demand for hedge funds among ultrawealthy investors, Ms. Kuechler predicted, will result in "more disbursements" among hedge fund managers. At the same time, she added, investors are increasingly worried that they are losing their preferred status and access to top managers, as institutional investors such as pension funds and sovereign wealth funds replace them.

INTERNATIONAL OUTLOOK

The IPI survey also found that 63% of members planned to in-crease their international investments, the largest increase by far of any asset category.

At the institute's recent fall conference in New York, the best-attended session was on investing in emerging markets such as Brazil, Russia, India and China, said Ms. Kuechler. Investors were particularly interested in so-called frontier markets — in African, Asian and South American countries new to global investing — and in the managers who specialize in them.

"Investors are looking quite creatively beyond the United States and Europe," Ms. Kuechler said.

Not surprisingly, given the real estate slump, the survey showed that more investors surveyed (17%) said they would decrease their holdings in real estate than was the case with any other asset class.

And for the first time, the IPI survey found that more of the association's members (38%) cited the Internet as their main source of news, followed by newspapers (31%), magazines (12%) and television (11%).

The result is even more significant, said Len Costa, IPI's director of interactive media, because a majority of the organization's members are more than 50 years old and nearly 30% are over 55.

"It shows that people of all ages are now comfortable with being online," he said.

In addition, Mr. Costa cited the survey's finding that half the members surveyed said they were "always on," or checking news and e-mail throughout the day.

"It shows how deeply the Internet has penetrated," he said.

The IPI has 367 member families and 1,100 individual members. More than one-third of the members have more than $200 million in investible assets, and 80% have $50 million or more, according to the organization.

The IPI universe may be "somewhat skewed" toward New York and the Northeast, and its members may be more knowledgeable, informed and engaged than the average investor, Mr. Evans said.

"In that sense, they are likely to act as bellwethers for investment trends among the very wealthy ... [and] are much more likely to be early adopters of new products, techniques and approaches, and more sensitive to shifts in conditions than most," he said.

More than 60 member families participated in the survey, which was completed last month.

Charles Paikert can be reached at cpaikert@crain.com.