26/09/18

Wealthy families investing less money in hedge funds

(New York Post) -- The country’s wealthiest families last year — soured by hedge funds’ high fees and poor returns — continued to turn their backs on the so-called smart money.

So-called “family offices” of the ultra-rich are putting less of their cash into hedge funds and more into other types of alternative investments — like private equity firms, according to a report out Tuesday.

PE firms have posted better returns of late — and often charge lower fees.

Last year was the third straight year family offices lowered the percentage of the funds allotted to hedge funds, according to the report.

The average hedge fund returned 2 percent through August, according to Hedge Fund Research. The S&P 500 index was up 8.5 percent over the same period — with much lower fees.

Hedge fund holdings stand at 5.7 percent of the average portfolio — down by more than a third over the past year, according to the report released Tuesday by UBS.

“I think hedge funds are expensive. I think they’re illiquid. I think they’re lacking in transparency,” one unnamed chief investment officer of a family office said in the report. The CIO admitted their office still invests in a few hedgies but only if they’re “particularly clever.”

Investors instead preferred to put money directly into the stock market, which saw a 3.9 percentage point increase in new money.

Although many hedge funds have moved away from their traditional, and expensive, “2-and-20” fee structure — that is, a fee of 2 percent of assets managed and 20 percent of profits — they’re still more expensive than index funds, which generally charge a fraction of 1 percent.

Investors from Warren Buffett to Bill Ackman have criticized the high fee structure. Ackman’s Pershing Square hedge fund altered its fee structure in 2016 so that investors paid a lesser percentage when the fund underperformed and a great percentage of profits when it did well.

Meanwhile, other hedge funds, such as Brevan Howard and Tudor Investments, lowered their fees in recent years.