Investors still relishing the taste of alternatives

Date: Tuesday, July 29, 2008
Author: Regecca Knight, Yahoo News

The topsy-turvy stock market has not rattled wealthy individuals, whose appetite for alternative investments - including hedge funds, venture capital and private equity - remains hearty, according to a survey being released on Tuesday by Bank of America (NYSE:BAC).

Over the past 12 months, a period in which the Dow has suffered a fall of more than 20 per cent, most respondents said they were satisfied with the performance of their alternative investments.

However, only 30 per cent were satisfied with the remainder of their portfolio of traditional investments, such as stocks, bonds and mutual funds, according to the survey, which was based on a sample of 403 investors with a minimum of $3m in assets and an average of $7.9m.

Those who had been invested in hedge funds for the longest time were the most satisfied. This degree of satisfaction indicates these investors have a comfort level with market cycles, says David Bailin, head of BofA's global wealth and investment management alternative investments group.

"Last July through now has been arguably one of the most difficult times in the market, but hedge funds have not only protected capital, but in many instances they have made money," he says. "Hedge funds are not correlated with the market and investors are starting to see those tangible benefits: they realise these investments are meeting and exceeding expectations."

The Morningstar 1000 Hedge Fund index is up 0.31 per cent since the beginning of the year. The Morningstar Global Hedge Fund index, which tracks funds that profit from price trends in futures, options and currencies, has returned more than 18 per cent over the past year, and the Morningstar Equity Arbitrage Hedge Fund index has gained more than 8.57 per cent.

"The turmoil in the markets is not in hedge funds, private equity or venture capital. Alternative investments are doing well, thank you very much. The press sensationalising hedge funds is wearing thin," says Mr Bailin, whose group works with individual investors as well as endowments, foundations and pension funds, and oversees about $6bn in assets.

Wealthy investors appear to have a realistic view of the risks and rewards associated with alternative investing, but those already invested in alternatives perceive less risk than novice investors in this market segment. For instance, when asked to describe their perceived level of risk for certain investments over the next five years, investors saw hedge funds as nearly four times more risky than stock mutual funds. Hedge funds are less transparent, and often invest in exotic securities.

"The perceived risk is going to go down as people have more experience with these investments. Over time this will abate," Mr Bailin says.

According to the survey, wealthy investors prefer hedge funds that are registered with the Securities and Exchange Commission: about 60 per cent of those surveyed report being more likely to invest in a hedge fund that is registered with the US regulator than in an unregistered fund. Half of those with existing hedge fund investments said the same, as did 56 per cent of those with any sort of alternative investments.

"In this environment I am not surprised. In this financial crisis, people still believe in the institutions of government, the SEC, the Fed, and the Treasury," Mr Bailin says.

More than half of those with hedge fund investments said they were more likely to invest in a hedge fund or fund of funds that has been carefully screened by an objective third party.

About one in five surveyed said they generally invested without the aid of professional advisers; but, when it came to hedge funds, they were more likely to seek professional investment advice. Only 10 per cent of hedge fund investors went it alone.

"The growth in the funds of funds space shows us that having independent advice is worth paying for. It's the advice that overcomes the risk factor," Mr Bailin says.