Rich pile back into hedge funds/alternatives

Ultra-high net worth investors in the US are renewing their love affair with hedge funds and other alternative investments as they move to protect their assets, according to a new survey.

Spectrem Group said the total investable assets in alternative investments of those with a net worth of at least $25 million (€19.7 million) has risen to 25% in 2012, compared with 20% in 2010 and a low of 16% back in 2007. In contrast, stocks and bonds, including restricted stock and options, accounted for just 18% of their total investments in 2012. Hedge funds, said Spectrem, are owned by 47% of the UHNW sample group.

The US-based research company said wealthy investors were seeking much higher returns through alternative investments as a way of protecting their wealth as they face the possible expiration of the Bush tax cuts on income and capital gains later this year.

"After the slow growth of the past few years, coupled with the potential of a sizable tax hit, the vast majority of these wealthy investors are seeking outsized investment returns. At a minimum, they expect their investment returns to exceed the overall market return," said George Walper, president of Spectrem.

"But many are considerably more aggressive, with more than one-quarter saying they expect to make an annual rate of return of at least 16%.” He added that more than 10% expect returns greater than 25%.

UHNW investors provided much of the initial impetus to the hedge fund boom of the 1990s and 2000s. But much of the lustre around the asset class was wiped out during the financial crisis of 2008/2009 when many investors got burnt by redemption restrictions and less than stellar returns.