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Wealthy look at hedge funds differently

Date: Tuesday, October 5, 2010
Author: Svea Herbst-Bayliss, Reuters

Wealthy investors, whose millions helped fuel the hedge fund industry's early growth spurt, still want to own alternative assets but on new terms, bankers to the world's richest families said on Monday.

Less than two years after the financial crisis decimated many portfolios -- the average hedge fund lost 19 percent even though some prominent ones lost twice that much -- the world's wealthy are still moving more slowly and cautiously when it comes to alternative assets.

"These gates have left a scar," said Anthony DeChellis, the Americas CEO of Credit Suisse's Private Bank, referring to the restrictions that hedge fund managers imposed on investors two years ago to prevent all assets from fleeing at once.

"Clients are still holding back," DeChellis said at the Reuters Global Private Banking Summit in New York.

Alternative assets include hedge funds, private equity and real estate -- investments designed to generate returns that are not the same as stocks and bonds.

Clients in the United States and Latin America are not the only ones feeling jitters when it comes to these often lucrative but sometimes risky portfolios, bankers in Europe and Asia agreed.

"We have seen a clear shift from alternatives into cash," Josef Stadler, global head of ultra high net worth at UBS said in Geneva. "I don't mean Treasury bills, I mean cash, cash, cash," he explained about investors' tastes.

As investors return to the $1.9 trillion hedge fund industry, where assets are still down 28 percent from the industry's peak in 2008, they want the most established and often largest hedge fund firms, bankers said.

On top of that, they want managers to make more concessions.

The taste for the tried and true is underscored by industry data that shows U.S. hedge fund firms overseeing $5 billion in assets or more taking in 1 percent in new assets during the first half. Roughly half of the slightly smaller firms, with assets of $1 billion or more, reported assets dropping or staying the same during that time, industry magazine AR reported last week.

Bankers are also saying that investors are now asking more probing questions of their hedge fund managers while also demanding greater freedoms that hint at changes once unthinkable in the super-secretive industry.

"People will require a lot more transparency going forward," Samir Raslan, regional head of central, eastern and northern Europe, Africa and Turkey (CENEAT) at Citi Private Bank, said in Geneva.

Exactly how hedge fund managers will react to this remains to be seen, but many bankers are saying that hedge fund managers are more sensitive to investors' needs and are willing to at least talk about making changes.

One of the most important requirements jittery investors now have, their bankers said, is their ability to get money out quickly. Even now, years after the worst of the financial crisis has passed, some prominent hedge fund managers have still not returned all of the money that investors asked for.

"Everyone is feeling the pressure on fees," Credit Suisse's DeChellis said, adding that fund managers are slowly offering investors more choices. "People are having more of an opportunity to choose paying a flat fee or a performance fee," he said.

Indeed, he sees a slow shift among managers to become slightly more consumer focused. "There are still some managers who say 'I am not changing anything' but many are becoming more flexible," DeChellis said.

"While a lot of clients think that picking large cap domestic stocks is the safest play, you need to be extremely well-diversified," Jay Welker, CEO of Wells Fargo Private Bank, said in New York, referring me the need to include what his bank calls complementary strategies.