The Markets July 29, 2008

HNW Investors Report Hedge Fun

Wealthy Americans expressed more satisfaction with their alternative investments than traditional investments over the last 12 months, according to a Bank of America survey.
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Alternatives across the board—hedge funds, venture capital, real estate, and private equity—beat out the more traditional investments, including stocks and bonds, according to a release of the survey results.

Thirty percent of the high-net-worth survey respondents holding alternative investments expressed satisfaction with the more traditional investment categories in their portfolios. However, many noted greater satisfaction with their investments among the four major categories of alternative investments: 51% reported satisfaction with their hedge funds, 44% with venture capital, 41% with real estate, and 35% with private equity.

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Headlines Don’t Deter

The bad rap hedge funds might have been getting in the press has affected some but not all of seasoned hedge fund investors, according to the release. When asked if negative publicity about hedge funds impacted their investment decisions, 44% of those invested in hedge fund vehicles said no and only 20% said yes, according to the release.

“Our study demonstrates that, despite the portrayal of hedge fund investors as risk-takers investing in aggressive managers, many high-net-worth investors have a realistic understanding of the risks associated with their holdings and realize that large alternatives managers are institutional in their investment approach and the quality of their investment professionals,” said David Bailin, president, Bank of America Alternative Investment Solutions, in the release.

More than half (57%) of high-net-worth (HNW) individuals surveyed who invest in hedge funds expressed satisfaction with these vehicles since their initial investment (with only 5% expressing dissatisfaction).

Close to half of hedge fund investors said they are more likely to invest in a hedge fund registered with the U.S. Securities and Exchange Commission (SEC) than a non-registered fund. Overall, nearly six out of 10 wealthy individuals surveyed (59%) said they are more likely to invest in a registered hedge fund. Roughly half of the 400 overall respondents (48%) and about the same percentage of those invested in hedge funds (51%) said they were more likely to invest in a hedge fund that has been carefully screened.

“The number of alternative investment vehicles has grown exponentially, yet there are few easy ways for investors to assess fund performance or manager talent,” said Bailin. “This is why the industry must commit to educating investors, strengthening performance reporting, and providing standardized information to enable investors and their advisers to make better investment decisions.”

The Bank of America Survey of Attitudes Toward Alternative Investments studied more than 400 HNW investors with greater than $3 million in investable assets. Of the survey respondents, 267 held investments in alternatives overall, including 92 who held investments in hedge funds or hedge funds of funds.

The Markets July 29, 2008

Individual Investors Remain Optimistic about Equities

Despite market conditions, a survey from Schroders found that U.S. individual investors are more invested in domestic and international equities than last year.
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The semiannual survey of investors from the asset management firm found that more individual investors (with at least $100,000 in investable assets) are investing in domestic and international equities. Three-quarters of the surveyed investors are investing in domestic equities and 60% in international equities—a dramatic increase from last year, when only 26% invested in domestic equities and 13% invested in international equities, according to a press release about the results.

“In spite of very poor economic news between the housing market and the credit market, and very poor returns in equities in the last year, nevertheless investors are keeping their nerve,’ said Alan Brown, Group Chief Investment Officer at Schroder Investment Management, speaking to PLANADVISER.com. In fact, they are more interested than they were a year ago. Brown said over the last 10 years, equities have given investors a pretty rocky ride. “That’s a long period of time in many investors’ memories,’ he said. “I think it’s very encouraging that given that experience, they’re still taking the longer term view.’

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According to the results, more than half of the surveyed investors (62%) believe the U.S. economy is in a recession, but remain hopeful about their annual returns. Almost all surveyed investors (94%) expect a positive annual rate of return on their investments over the next 12 months, with more than half (55%) expecting an annual rate of return of at least 5%.

Investors view the top three investment opportunities during a recession as international equities (34%), domestic equities (31%), and property (27%). Of the respondents who hold bonds (48%), only 21% chose bonds as a top buying opportunity amid a recession. Thirty-nine percent of investors claim that diversifying investments between domestic equities, bonds, and cash is most appropriate during a recession, while 17% of investors believe diversifying investments internationally is more appropriate

The number of investors interested in emerging markets is also on the rise. Within international equities, 25% of investors indicated that emerging markets are better buying opportunities. Brown also found that statistic encouraging, as it shows investors are recognizing the potential of emerging markets.

Alternative Investments

Probably less surprising than the equity results is that individual investors have not completely begun taking advantage of alternative investments, Brown said. Alternative investments are just beginning to be made more accessible to individual investors. Although almost half (45%) of U.S. investors have begun to understand and reap the benefits of alternative investing, the vast majority of these investments (68%), are directly related to property investments.

Only 10% of investors rated other alternative investments as top buying opportunities during a recession. A handful (2%) of investors surveyed saw hedge funds as opportunistic alternative investments, putting them last in the category. Commodities and private equity were most commonly ranked as opportunistic alternative investments, at 9% and 4% respectively.

Brown points out that the results might be different with a survey sample of those with much more investable assets. “For those with smaller amounts of money, alternative investments are still relatively inaccessible,’ he says.

The survey also found that 69% of investors have certificates of deposit (CDs), savings accounts, or money market funds, and 59% have money market investments.

Schroders conducted the online poll of 507 investors in May.

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