World Wealth Report Shows Burgeoning Growth In Hedge Funds

by Phillip Morton, Investors Offshore.com

15 July 2003

The 2003 World Wealth Report compiled by Merrill Lynch and Cap Gemini Ernst and Young has found an increasing preference amongst investors for alternative investments and hedge fund products, which are now being considered a safer bet than traditional equity based investments.

"The report found high-net-worth individuals (those with assets of US$1 million excluding real estate) continued to allocate a growing percentage of their assets to alternative investment classes," commented James Gorman, Merrill Lynch's president of the Global Private Client Group. "The average high-net-worth individual invested approximately 10% of their assets in alternative investments in 2002. However, the higher the wealth-band, the greater the proportion of alternative investment products in the portfolio," added Mr Gorman.

According to the report, funds under management grew by 8% in 2002 bringing the total amount invested n hedge funds to some $650 billion worldwide. Strangely, given the country's economic malaise in recent years (or perhaps because of it), the greatest appetite for hedge funds recently has come from Japan, which has seen a strong increase in demand for alternative investment products.

By 2010, the report estimates $1.5 trillion will be invested in hedge funds globally. The steady growth in the hedge fund industry has been helped by a comparatively strong performance in comparison to equity mutual funds. In 2002 the average value of equity mutual funds fell by 20.3% compared to 0.2% growth in hedge fund performance.

Diversification into other investments, most notably real estate, has been another trend noted in the World Wealth Report. Accordingly, some $7.9 billion was invested in commercial real estate last year, $3.9 billion of which was by Germans, and $1.18 billion by investors from the Middle East.

Other favourite investment vehicles used by HNWIs include luxury goods such as wine (the wine index outperformed stocks by 97% between 2000 and 2002) and art, as well as precious metals such as gold and platinum.

Mr. Gorman concluded: "This benchmark report highlights the need for diversified asset allocation. It is one way that HNWIs have been able to maintain their wealth during volatile markets."

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