Americans Satisfied With Alternative Investments

by Phillip Morton, Investors Offshore.com

19 August 2008

Many wealthy individuals who held alternative investments expressed greater satisfaction over the last 12 months with every category of alternatives, including hedge funds, venture capital, real estate and private equity, than their more traditional investments, including stocks and bonds, according to a Bank of America survey.

"The Bank of America Survey of Attitudes Toward Alternative Investments," released last month, studied more than 400 high net worth investors with greater than USD3mn 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. Nearly one-third (32%) of the data collected focused on the attitudes of individuals with investable assets of USD10mn or more.

While only 30% of wealthy Americans surveyed who held alternative investments expressed satisfaction with the more traditional investment categories in their portfolios, many noted greater satisfaction with their investments among the four major categories of alternative investments; 51% with their hedge funds, 44% with venture capital, 41% with real estate and 35% with private equity.

Additionally, the findings indicated a positive relationship between satisfaction with alternative investments and the length of time the investments were held. Investors with 10 or more years of experience in alternatives were almost twice as likely as those with fewer than 10 years of experience to be "extremely satisfied" with their total portfolio since their initial investment.

"Alternatives are timely investments because dislocations create the types of opportunities that funds with stable, long-term capital thrive on," said David Bailin, president, Bank of America Alternative Investment Solutions. "Our study demonstrates that alternative investors recognized that even in stressful market conditions, alternative investments are an important component in an overall portfolio and can help mitigate portfolio volatility."

Negative stories published about hedge funds appear not to have deterred experienced hedge fund investors, according to the survey's findings. 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.

"The number of respondents who say they avoid hedge funds out of fear has been described as a trend by some industry watchers. However, experience with alternative investments and access to advice seems to have overcome fear, according to the survey findings," Bailin said. "For example, the majority of respondents with investments in hedge fund vehicles (55%) said that they are not deterred by the possibility that they will lose more money than they can afford to by investing in such funds. Only 10% said they were afraid."

Current Perceptions of Hedge Funds

"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," Bailin noted.

Noteworthy findings regarding hedge funds include:

- More than half (57%) of wealthy Americans surveyed who invest in hedge funds expressed satisfaction with these vehicles since their initial investment, with only 5% expressing dissatisfaction

- When asked to describe their perceived level of risk for certain investments over the next five years, 54% of investors in alternatives viewed hedge funds carrying risk, while only 17% perceived risk around stock mutual funds

- Nearly six out of ten wealthy individuals surveyed (59%) said they are more likely to invest in a hedge fund that is registered with the US Securities and Exchange Commission (SEC) than a non-registered fund. Close to half (48%) of investors invested in any type of hedge fund instrument also said they are more likely to invest in an SEC-registered hedge fund compared to a non-registered 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. Just 24 percent of overall respondents and 18% of those invested in hedge funds did not believe third-party screening was important

"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 advisors to make better investment decisions."

Recommended