Hedge Funds Are Falling out of Favor with the World’s Wealthy

Some of the world’s wealthiest investors are saying sayonara to hedge funds. 

A growing number of family offices and high-net-worth clients are reportedly kicking their traditional hedge funds to the curb in favor of higher-yielding, and less expensive, investing options elsewhere. The funds have been run-of-the-mill on average this year, and even failed to outperform the S&P 500, according to new research from alternative investment data provider Preqin. That’s been a hard sell for the world’s wealthy.

More than a third (35%) of the 185 institutional investors surveyed told the data provider they would pull back the proportion of their investments in hedge funds by as much as 10 percentage points this year. “They’re starting to move away from hedge funds in favor of alternative assets and private placements,” said Robert Hodgins, founder of private equity firm Sand Hill Road. “There’s been a noticeable shift.” 

Livin’ on the Hedge

Hedge funds on average returned just 6% at the midpoint of this year and lagged behind many of the important benchmarks, according to the report. The S&P 500 climbed as much as 15% over the same time frame — a fact that wasn’t lost on the wealthiest investors. 

But there’s also a desire for more control, transparency, and diversification, Hodgins said. Some of the world’s upper crust have found alternative strategies can allow for more customized approaches with potentially lower fees. “It’s posing a real challenge to the traditional hedge fund model,” he told The Daily Upside. “Given the economic uncertainty we’re facing, this could be a lasting change.” 

For Matt Willer, managing director of Capital Markets and partner at Phoenix Capital Group, the advantages are higher returns, much lower fees, and more defined returns without the need to worry about market volatility. “We are seeing this trade every day,” Willer told The Daily Upside.

Hedge Hogs. Make no mistake, hedge funds are still a dominant investment category globally for the wealthy. Total combined assets topped $4.5 trillion worldwide last year, according to the Alternative Investment Management Association. But those investments have been in a somewhat steady decline in recent quarters:

• There were 7,682 global investors in hedge funds at the end of last year with 29,876 total funds worldwide. 
• Assets in hedge funds declined $27.6 billion in the fourth quarter of last year alone.

“[There’s] a reallocation from the growth stories that have walked up the indexes, into the private asset classes that deliver more consistent non-market correlated, and attractive, absolute returns,” Willer said.