Wealthy investors cut exposure to hedge funds

Date: Thursday, January 18, 2007
Author: James Langton, InvestmentExecutive.com

Industry faces a challenge in restoring its popularity among important segment.

The very richest Americans have soured somewhat on hedge funds, according to new research from Spectrem Group.

It found that households with a net worth of US$25 million or more (not including primary residence), reduced their exposure to hedge funds significantly in 2006. Just 27% of those households owned hedge funds last year, down from 38% in 2005, according to the report. That represents a decline of 29% in a year that brought some well-publicized challenges for the industry.

The Ultra High Net Worth segment as a whole, representing households with a net worth of US$5 million or more, saw total hedge fund exposure fall to 14% in 2006 from 17% in 2005, it added. The decline was most prevalent among the wealthiest subset of this group, the US$25 million-plus households.

"Hedge fund investing appears to have lost some of its luster for the very richest Americans. A nearly one-third decline in the percentage of those households investing in hedge funds suggests the difficulties of 2006 have made their mark," said Catherine McBreen, managing director of Spectrem Group. “This trend impacted the overall Ultra High Net Worth market, but no segment so significantly as the very wealthiest households. It will be interesting to see if the industry can restore its popularity among this important segment as 2007 progresses.”

The mean balance invested in hedge funds by households with a net worth of US$25 million or more was US$1.6 million in 2006. For those in the US$10 million-to-US$25 million bracket the total was US$547,000, declining to US$202,000 for households with a net worth of US$5 million to US$10 million. Ultra High Net Worth households altogether had a mean hedge fund balance of US$739,000 in 2006.

The report is based on a mail and online survey of 526 qualified households in the United States. Questionnaires were fielded in July 2006 and completed by the person primarily responsible for the household's financial decisions. The survey has a margin of error of plus or minus 4.3 percentage points.