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.
Secretive
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