Hedge Funds Increasingly Being Added to Individual Investor Portfolios Worldwide

Date: Monday, August 5, 2002

BUT SEEK ADVICE BEFORE INVESTING, URGES MERRILL LYNCH- As investors around the world look for investments in today's volatile markets, many are increasingly adding alternative investment products, such as hedge funds, to their portfolios. Merrill Lynch (NYSE: MER) notes the recent growth in hedge funds as well as some positive performances. Van Hedge's Global Hedge Fund Index, for instance, rose 6.1% in 2001, notes the World Wealth Report 2002 recently published by Cap Gemini Ernst & Young and Merrill Lynch. "Hedge funds were one of the fastest-growing asset classes among individual investors last year," said Phil Sieg, global head of segments at Merrill Lynch's International Private Client group. "Investor demand around the world for alternative investments has never been greater." "Hedge fund assets under management grew 34% last year, with some U.S. $144 billion of new assets invested in 2001. This brought the global total invested in hedge funds to about $563 billion," said Mr. Sieg. "The number of hedge funds has expanded to about 6,000 in 2001, up from 880 in 1991." "Some of the greatest growth in demand for hedge funds has been in Europe, where the market has quadrupled to $64 billion since 1999, creating a significant alternative to U.S. hedge funds." He said this increased demand for hedge funds around the world was the result of investors, in particular high-net-worth investors, seeking investments that are not correlated with volatile equity markets and to diversify investment portfolios. Mr. Sieg also noted differences between hedge fund investors around the world. "For example, there is a tendency for North American investors to select their fund-investments via sector exposure rather than geography, whereas the reverse is true for their European counterparts." However, no matter where the investor, he cautioned investors also should be aware of the pitfalls of hedge funds. "Before investing in any of these products, an individual should discuss with their financial consultant the investment techniques employed by the fund managers of the various hedge funds, enabling the investor to select those funds with strategies which are most suitable for his or her investment style, risk tolerance, investment goals, returns sought by the investor, and many other issues including downside volatility and lock-up periods." Hedge Funds Use Wide Range of Strategies- Hedge funds managers use a range of styles from high-risk to those which are less aggressive. The high-risk styles seek high returns and generally employ higher leverage, while the latter primarily seek to preserve capital and realize gains in many different market environments and may use leverage more conservatively. To achieve their results, hedge fund managers often combine different strategies, products and tools, such as derivatives and leverages. In addition to different strategy mixes, some hedge funds define a specific period, known as the lock-up period, during which investors can't redeem the shares. And, trading is generally less frequent at a hedge fund than a traditional mutual fund, Mr. Sieg explained. In selecting a higher-risk fund, investors should work with their financial consultant to explore risk-management scenarios, examine portfolio transparency in terms of concentration of holdings, and the kinds of leverage being used. Similarly, if an investor is considering a fund of hedge funds, he or she should work with financial consultants to better understand the relationships among the different strategies and the criteria being used by the fund managers. In either case, investors also should ask about a fund manager's experience in overseeing hedge fund strategies, dealing frequency and fee structures. Investors may also face legal or regulatory restrictions to investing in hedge funds in their particular countries.