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Wealthy Wary of Putting New Money in Hedge Funds

Date: Monday, January 19, 2009
Author: Svea Herbst-Bayliss, Thomson Reuters.com

Millionaires who long put money with hedge funds are now skittish about adding fresh cash after these loosely regulated portfolios posted record losses last year, a top industry executive said on Thursday [Jan. 15].

"We have probably seen the worst of the [hedge fund industry redemptions], but I think it will be a slow go to build up that asset base again," Don Heberle, executive director at Bank of New York Mellon Corp.'s Wealth Management unit where he oversees the Family Office and Charitable Gift Services groups, said in an interview.

The potential of hedge funds to deliver strong returns in all markets because they can sell stocks short and use borrowed money has appealed to wealthy investors for years. With the help of people like Mr. Heberle's clients—families that are worth more than $100 million—hedge fund industry assets doubled to $2 trillion between 2005 and 2008. Last year, though, the average hedge fund lost 19%, and investors pulled out a record $148.4 billion in December alone. That performance shrank the industry to about $1 trillion, according to data from BarclayHedge.

Even though industry experts are quick to note that hedge funds fared better than the broader Standard & Poor's 500 index which lost 37%, Mr. Heberle said in a telephone interview, "people are leery now. There was a move away from high-risk assets like hedge funds to less-risky assets last year and we are still seeing that."

A recent study from the Spectrem Group shows that American millionaires watched their assets shrink by 30% during the economic crisis and only 36% said they were pleased with their financial advisers' performance.


Hedge funds may have an especially tough time bringing wealthy individual investors back because hedge funds tend to be secretive and lock up investors' money for years. Late last year dozens of hedge funds, including industry powerhouses Citadel Investment Group and Tudor Investment Group, suspended investor redemptions, adding insult to injury for many millionaires who had already lost a bundle.

"Hedge funds are viewed as being less liquid and transparent, and that combined with the market downturn has caused a lot of people to say 'I need to be and want to be more liquid,'" Mr. Heberle explained.

Still Mr. Heberle, who has seen his group's revenue jump 20% in 2008 from 2007 as clients flocked to BNY Mellon from other large investment advisers as these merged, cautioned clients against being too careful for too long.

Mr. Heberle said market downturns and industry shakeouts provide an opportune time to get back in. Hundreds of hedge funds have shut down in the last months, leaving what industry experts call the more durable and profitable players intact.

"Somewhere here the markets will bottom and that will create lots of opportunities," Mr. Heberle said. He said he expects his wealthy investors to regain their appetite for hedge funds only gradually, saying people will be slower to commit and slower to build portfolios.

"The money will come back in over time, but I don't expect it will be a massive wave here at the front of end of this year."

By Svea Herbst-Bayliss