The Rich Got Richer, Even Last Year, By Using Alternative Investments

by Jason Gorringe, Tax-News.com, London

17 May 2001

The World Wealth Report, published this week by US investment bank Merrill Lynch and consultants Cap Gemini Ernst & Young, shows that very rich people managed to preserve their wealth last year despite catastrophic falls in some types of asset - and the report shows how they did it.

According to the World Wealth Report, there are 57,000 'Ultra High Net Worth Individuals' in the world with more than $30m of liquid assets to invest (so now you know why you can't get tickets for Glyndebourne). And they devote about 17% of their portfolios to structured products, such as income-generating notes and index trackers, and alternative investments, including hedge funds, private equity and managed futures funds.

The 7.2m investors with a mere $1m each to invest had about 9% allocated to these asset classes, says the report. The two groups boosted their assets by 3 and 6 per cent respectively last year while almost all straight equity-based investment strategies showed losses.

"The wealthy tend to have more professional advice, and the hand-holding helped them," said Keith Stock, global head of financial services at Cap Gemini Ernst & Young. "They tend to move in and out and shift their asset allocation whereas investors in mutual funds, for example, tend to stick with it and be long-term investors."

Structured products helped to preserve wealth by allowing wealthy investors to hedge against market declines, Mr Stock said. Single-stock hedges, for example, can be used to insure against heavy exposure to one's own company's stock. "Most of these (strategies) used to exist only in the institution-to-institution market," said Mr Stock. "The standards are still high for minimum investment . . . but eventually I think it will go down to not just the high net worth but also the upper echelon investors. Many professional service companies are already offering (hedge fund exposure) through their retirement plans."

The report says that venture capital funds topped the asset class rankings last year, generating an average return of 41%, while hedge funds gained 11.3% and managed futures funds 9.4%. The average performance over the last four years for both VC and hedge funds was even better, apparently.

The fastest-growing asset class over the last 5 years has been private equity, with commitments rising at an average of 35% a year since 1996 to $63bn. Hedge fund assets have grown 13% annually to $400bn.

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