High Net Worth Investors Grudgingly Return to Hedge Funds

September 7, 2011

High Net Worth Investors Grudgingly Return to Hedge Funds

Even as the memories of the 2008 liquidity crisis remains fresh in their minds, high net worth investors are returning in increasing numbers to hedge funds, perhaps grudgingly, as a haven from stock market volatility. According to a survey conducted by Rothstein Kass of family office directors, 90 percent say they plan to increase their allocation to hedge funds in 2011. $62 billion was placed in hedge funds in the first six months of 2011, the most since 2007, which strong evidence of that investor sentiment.

With the stock market gyrating like an out-of-control top, and bond yields continuing to fall, HNW investors are turning to hedge funds as the happy medium. Although hedge funds returns in 2011 have been anemic at best, averaging just 3.4% through August, but they look pretty decent next a 3% decline in the S&P 500, and a 1.5% long bond yield.

Investors in search of returns seem to be willing to look beyond the hefty 2 percent management fee and 20 percent performance fees. Even the lack of transparency that continues to envelope hedge fund management is not enough deter investors still shell-shocked from the financial-crisis fallout. Hedge funds, which tend to have a low correlation to the stock market, become increasingly more appealing to investors the more volatile the markets become. No longer able simply ride a straight up market, investors are willing to turn back to the experts and pay them handsomely to protect their assets.

Hedge fund managers are responding to investors’ well-founded concerns over liquidity, by increasing their allocation of marketable investments in order to increase their funds’ liquidity, and by relying less upon leverage.  Investors have also changed their preferences and are considering smaller funds which tend to be more responsive to market conditions. Still, investment performance will continue to be the primary criterion for fund selection, and for cynical investors, it will likely be the primary determinant as to whether they will continue to pay hedge fund-sized fees.






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