Despite '08 pain, the rich still like hedge funds

Date: Thursday, October 8, 2009
Author: Joseph A. Giannone, Reuters

It appears nothing -- not losses, redemption gates or lofty fees -- can deter the rich from stashing their cash in hedge funds.

A year after crumbling markets triggered losses and fund managers drew fire for blocking redemptions, wealthy investors have not abandoned hedge funds, according to private bankers and wealth managers attending the Reuters Global Wealth Management Summit this week.

"We see continued dedication to hedge funds," said Catherine Keating, chief executive of JP Morgan Chase & Co's (JPM.N: Quote, Profile, Research, Stock Buzz) U.S. private bank, which advises families whose combined assets total $350 billion.

It was not too long ago that critics and regulators concluded the hedge fund model was fatally flawed: too expensive, too secretive, and managers failed to deliver on promises of positive returns regardless of the environment.

Still, wealth advisers contend the hedge fund is still an attractive option with the right managers.

"The things our clients are focused on are how does that hedge fund generate its returns? How much is correlated to the market?" Keating said. "Clients care about transparency -- what fees are they getting charged. They don't mind paying fees as long as they're getting value."

Some wealth advisers argued last year's turmoil was a generational turning point, a catastrophe like the Depression that could alter appetite for risk.

"The events of last year may have forever changed attitudes toward investing. It may be that their allocations to growth and equities will be lower," said Moffett Cochran, CEO of Silvercrest Asset Management, a boutique firm advising families with tens to hundreds of millions of dollars.

"The vast majority of hedge funds had negative returns. The whole concept of absolute returns embedded in the hedge fund rationale was thrown out of the window as a result of what happened last year," Cochran said.

Even so, Silvercrest itself manages a multibillion-dollar fund that invests client money in other hedge funds. Last year the Silvercrest fund fell, though far less than the overall stock market.

In general, paralyzing fear of Armageddon has been replaced by caution, the bankers said. Clients are starting to invest cash, selling down safe government bonds and seeking new opportunities.

David Lamere, CEO of BNY Mellon Wealth Management, said, "We tell clients to stay fully invested across a broad number of asset classes. We're still overweight international (stocks) and a little underweight the domestics; and they haven't given up on alternatives. In most cases, alternatives fared pretty well last year."

That said, investors are more alert to the potential for market upheaval and more focused on the need for ready cash as they select investments, the bankers said.

"Generally we've seen clients shift one step down in their risk tolerance," said Keith Whittaker, a managing director at Wells Fargo Family Wealth and an adviser to families that invest tens to hundreds of millions of dollars.

An aggressive investor, for example, may pursue a moderate approach, while a moderate investor will adopt a conservative stance, Whittaker said.

"Will that last? I don't think so. We as people have short memories," he said. "We're optimists and hope for the best. So unless there's some other disaster, people will shift back to riskier approaches."