US Hedge Funds Failing To Reach HNWI Market, Survey Suggests

by Carla Johnson, Investors Offshore.com

26 April 2007

While more than half of American high-net-worth investors agree that hedge funds deliver a very good return in investment, the majority of them find it difficult to find information on hedge funds and to pick a suitable hedge fund in which to invest, according to a new survey.

The 2007 Survey of Affluent Americans, conducted by wealth management firm US Trust, found that 55% of respondents viewed hedge funds as delivering very good returns, while 51% believed that there were a good tool for reducing portfolio risk. However, three out of four (77%) agreed that hedge funds are difficult to investigate and 76% thought that a good fund is difficult to identify.

Ultra high-net-worth respondents (classed as those with assets of more than $25 million) appear more likely to include hedge funds in their portfolio saying that hedge funds make up 6% of their portfolio compared to high net worth respondents, who say hedge funds make up only 2% of their portfolio.

“The findings reveal that there is still a limited understanding of hedge funds and other sophisticated products, even among Americans wealthiest households,” observed Frances Aldrich Sevilla-Sacasa, president and chief executive officer of US Trust. “More importantly, they also highlight the need for continued investor education around alternative investment vehicles and the importance of having unbiased advice.”

In other findings, the survey found that 84% of respondents built their wealth from scratch or became wealthy later in life, while 87% agreed about the importance of encouraging entrepreneurial values in children.

Most of those polled (85%) reported that their portfolios met (45%) or exceeded (40%) their expectations during the past fiscal year. The annual average rate of return for the US market is 8.85% compared with 9.66% for international stock markets. The vast majority said that domestic stocks (81%) and real estate (80%) provided the greatest returns on their investments, and had a significant impact in generating wealth.

Although overall economic outlook amongst respondents is generally optimistic, a perception of increasing risk in US stock markets is reflected in an anticipated shift in the distribution of US and international equities within some portfolios. Over half (51%) believe that the US stock market is becoming riskier. A significant proportion (18%) of those respondents who were asked to evaluate the US stock market plan to move out of US stocks, versus only 8% of those who were asked about international stocks, who plan to move out of that asset class.

The top financial worries of respondents are that the US is losing its competitive edge in the world economy (74%) and that the budget deficit will affect the economy over the long-term (74%). These were followed by concerns that the next generation will have a more difficult time financially, cited by 73% of survey respondents. Seventy-two percent of respondents worry that environmental issues will require more government spending and that taxes will rise significantly over the next few years. Another prominent concern is that high taxes will reduce the value of their estate (71%).

Philanthropy remains a high priority for wealthy individuals. The survey revealed that many respondents are actively involved in their decisions regarding charitable giving. Eighty-eight percent say they give because of a desire to return something back to society, and nearly three in four (72%) say they make charitable donations because they want to make a difference in the world. Organizations most likely to receive donations are academic institutions and health-related organizations. About two in three say these are the charities they would consider leaving money to (68% say academic institutions and 66% say health-related institutions). Religious institutions are cited by 43% as a type of charity to which they would consider leaving money.

Interestingly, of less concern when making charitable donations are tax considerations, which are among the least cited reasons for wealthy individuals to make charitable donations, as only 33% of respondents cite this as a reason for donating. Respondents also say that upholding a family tradition of giving to a charity is less of a concern when donating: less than one in four (24%) say they make donations just to uphold their family tradition.

Recommended