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Private Investors Squeezed Out Of Hedge Fund Market

by Phillip Morton, Investors Offshore.com

01 December 2005


The spectacular growth in hedge funds over the last couple of years has seen the traditional client base of the alternative asset management universe, formerly the preserve of ultra wealthy private investors, squeezed out by increasing participation in the industry from institutional investors.

It was only five years ago that, according to Tanya Styblo Beder, who runs Tribeca Global Management hedge fund, the overwhelming majority of the then $500 million of assets managed by hedge funds were from wealthy individuals. Now, the landscape has changed markedly, and the proportion of private investors' assets with hedge funds has declined through a combination of institutional muscle and hedge funds' decline as a tool to hedge against falling equity prices.

"If we go forward to the year 2010, it's estimated that 80 percent of the assets under management in the hedge fund industry will be from institutions. So it's a big switch that's happening," Tanya Styblo Beder was quoted as observing by Reuters.

Data provided by IFS, a UK financial lobby, has revealed that only 44 percent of the assets in the industry came from wealthy people in 2004, down from more than 60 percent in 1996. Institutions accounted for roughly 30 percent of inflows in 2004, a number expected to rise to 50 percent by 2008.

While the growth in the hedge fund industry, which now manages more than $1 trillion in assets, was fuelled by their ability to make double digit returns by short-selling shares as equity markets plummeted, it is thought that less than impressive returns in 2004 and 2005 while these markets have rallied, has deterred many new private investors from committing money to hedge funds.

"Interest in hedge funds, certainly from a private client perspective, is waning, because they see that there are again decent returns to be made in equity markets," noted Stan Beckers, a hedge fund manager at Barclays Global Investors.

Furthermore, hedge fund fees, which typically constitute a 2% management fee and a 20% performance fee, may also be acting as a barrier to private investors. With their financial clout, institutional investors can often negotiate more favourable fee structures fees with hedge fund managers.

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, and hedge funds is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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