Wealth Managers Investing in Hedge Funds – February 2013

Date: Thursday, February 28, 2013
Author: Claire McNeil, Preqin

Hedge funds are an attractive choice of investment for wealth managers seeking diversification through alternative investments. There are currently 344 wealth managers active in the hedge fund space according to Preqin's Hedge Fund Investor Profiles database. Though wealth managers are often not bound by the same restrictions as institutional investors such as pension funds, they may suffer from liquidity constraints and being too small to access investments with larger bite sizes and may therefore still be restricted in hedge fund choice.

Emerging managers may offer investors lower fees and niche strategies, which could be a draw for wealth managers seeking to benefit from diversification without a higher price tag. Fifty-eight percent of wealth managers actively investing in the hedge fund space will invest or will consider investing with emerging managers. The location of wealth managers considering emerging managers is varied, as are their location preferences for hedge fund investments, with 83% of these managers considering hedge fund investments on a global scale. Of the 42% of wealth managers that will not consider an emerging manager, 87% invest in the space on a global scale, placing a greater emphasis upon manager track record than location. Overall, 30% of wealth managers have a preference for North America-focused hedge fund investments, and Europe-focused and Asia & Rest of World-focused hedge funds are a preference for 21% and 24% of wealth managers respectively.

Wealth managers place great emphasis on factors other than manager experience and location when selecting a hedge fund investment, such as strategy, product differentiation and client suitability. This point is further evidenced by the fact that only 12% of wealth managers investing in hedge funds prefer to invest in domestic only hedge funds, the remainder investing either globally or domestically with additional international exposure.

As confidence continues to rebound in hedge fund investments, it will be interesting to see whether investments with emerging managers will yield the abnormal returns anticipated by wealth managers considering them as part of their portfolio, or whether their more experienced or established counterparts will continue to take the lead.