Advisers for ultrawealthy investors are bullish on hedge funds, with many planning to increase their allocations to the alternative investments next year, according to a new study.
Advisers for ultrawealthy investors are bullish on hedge funds, with many planning to increase their allocations to the alternative investments next year, according to a new study.
A majority (58%) of single-family offices around the globe participating in the On the Rise survey indicated plans to increase asset allocations in hedge funds for 2009. The study was co-sponsored by Red Bank, N.J.-based G Capital Management LLC and Rothstein Kass & Co. PC of Roseland, N.J.
The study of 146 single-family offices was completed in late August, before the Wall Street turmoil began in mid-September, and as a result, many of these firms were contacted again to see if their plans were changing. However, in the ensuing follow-up interviews, an even greater percentage (62%) said they would boost hedge fund allocations next year.
Single-family offices are defined in the study as "created exclusively for or by a single exceptionally wealthy family to provide control, negotiating leverage and a defense for family members." The single-family offices surveyed had investible assets ranging from $312.2 million to $1.3 billion, with a majority of the firms (58%) based in Canada and the United States.
"I was surprised [that plans for increasing hedge fund allocations] was as strong the second time around," said study co-author Russ Alan Prince, president of Darien, Conn.-based Prince & Associates Inc. "I think it's going to stay strong."
The September follow-up interviews also showed a change in single-family offices, saying that they would reduce allocations to hedge funds (11%), compared with 19% from the August survey. Twenty-seven percent of single-family offices at the end of September planned to keep hedge fund exposure the same, compared with 24% when the survey was taken the first time.
"Their enthusiasm for the product doesn't seem to be waning," co-author Hannah Shaw Grove, a principal at Edison, N.J.-based HSGrove Private Wealth Consultancy, said of the many single-family offices that are bullish on hedge funds. "They want to avail themselves [of] any type of strategy that can mitigate risk."
One major reason behind single-family offices' increasing hedge fund exposure is that many wealthy clients have the luxury of taking risks to try and capitalize on distressed assets, Mr. Prince said.
SEEING AN OPPORTUNITY
"The very wealthy, who have not been blindsided by [the market turmoil] ... are looking at [these volatile times] as an opportunity," he said. "The investors are driving this more than anything."
FGMK/Preservation Capital Partners LLC, which serves many single-family offices, is planning to increase its allocation to hedge funds next year to between 27% and 30%, from 25%. The Bannockburn, Ill.-based wealth management firm is planning this alternative strategy due to a belief that the market's volatility will last well into 2009 and that hedge funds tend to perform better than other products.
"In markets such as these, it only creates further opportunities [for hedge funds] going forward," said Randal L. Golden, managing director at FGMK/Preservation, which has about $137 million in assets under management. "Distress is an area of attractiveness for a lot of hedge fund managers."
In September, hedge funds declined 6.2%, compared with a 9.1% drop by the Standard & Poor's 500 stock index, according to data compiled by New York-based Hennessee Group LLC.
The trend of increasing hedge fund allocations is being seen not just at single-family offices but among a variety of high-net-worth investors at wealth management firms, according to Angelo Robles, who last month founded the Family Office Association LLC, a Greenwich, Conn.-based organization focused on the exceptionally wealthy (InvestmentNews, Oct. 13). "When there is blood on the street, it creates opportunities for [high-net-worth investors]," said Mr. Robles, who has worked as an investment consultant and insurance executive.
Despite the study's findings, some wealth managers are more bearish when it comes to hedge funds, such as Paul Karger, managing partner at Twin Focus Capital Partners LLC, a Boston-based multifamily-office firm that also serves as a consultant to single-family offices. His 15 family clients have hedge fund allocations ranging from 20% to 40%, and he plans to recommend a reduction because of the losses that many of the alternative investments have incurred in the past two months.
LOTS OF FEAR
"With all the recent headlines, people are scared across the board," said Mr. Karger, whose firm has about $1.1 billion in assets under advisement. "You're going to see massive redemptions in the hedge fund space."
E-mail Andrew Coen at acoen@investmentnews.com.
