TIGER 21: ULTRA WEALTHY PREFER PE TO HEDGE FUNDS
Hedge funds are losing their appeal to the ultra-wealthy while private equity is making gains, according to a new survey from TIGER 21, a peer-to-peer network for high-net-worth investors.
The firm’s annual Member Favorites Survey polled more than 290 members, who collectively manage approximately $30 billion in investable assets.
Hedge funds lost two percentage points from a year ago, with 15% of members selecting a hedge fund investment as their favorite for 2014. The hedge fund category broken down by investment strategy showed a bit of movement: equity long/short remained the most popular (39%), but declined by five percentage points. relative value strategy (24%) moved up two positions to the second most popular strategy. Next was multi-strategy (12%) followed by event driven (9%), fund of funds (9%), and macro (6%).
“Members’ allocation to hedge funds is at an all-time low. With 40% growth in our membership this year (the strongest year in our 15-year history) it is unclear to what extent the low hedge fund allocations reflect different priorities in new members’ portfolios or whether it is a further erosion in members’ attraction to hedge funds,” said Michael Sonnenfeldt, founder and chairman of TIGER 21. “Hedge funds used to be a primary substitute for public equities, but it is possible that members now feel they are getting more efficient equity exposure through ETFs and indexes.”
Members’ favorite hedge fund manager in 2014 was Elliott Management.
Here is what the ultra-wealthy had to say about a number of their other 2014 investments.
Public equities remained the investment of choice for high-net-worth investors, but they did lose some ground from 2013: 35% of members named public equities as a favorite investment-down 6 percentage points from a year ago.
The most common public equity investment was individual stock purchases at 43%, a seven percentage point decrease from 2013 and a full 14 points below 2012. ETFs, at 25%, gained four percentage points from last year, followed by mutual funds/long only funds at 17% and hedge funds at 14%.
The most popular equity sectors according to respondents were financials at 27% followed by consumer discretionary and energy, both at 16%. The next most popular sectors were technology at 13% and health care at 11%.
Apple and Berkshire Hathaway again swapped spots for favorite single stock pick with Apple reclaiming the top position and Berkshire at number two. The next three favorite equity picks were SPDR S&P 500 ETF, Health Care SPDR ETF, and iShares MSCI Emerging Markets ETF.
“Our members are long-term investors. They are attracted to investments that appear to have long stretches ahead of predictable success. In the case of Apple and Berkshire Hathaway, regardless of which stock comes in on top, their consistent presence on our list shows that our Members have a fundamental belief in those companies for the long-term,” said Sonnenfeldt.
Members’ favorite equity managers in 2014 were Chickasaw Capital and A.L. Stuart & Co., both MLP specialists.
Private equity was the favorite investment strategy of 19% of respondents, continuing a multi-year increase in popularity for this asset class. Breaking that down, the survey found 63% of private equity investment was allocated to direct investments in members’ own companies, another 17% went to private companies that were not their own, and the remaining 20% was targeted to funds.
“Private equity continues to be a growing focus for our members and for good reason. Members feel that investing in private equity is something they understand because so many members created their wealth in private companies. Also, members like the superior access to information in private companies, so they are often among the first to learn about problems so they can pitch in and help solve them,” said Sonnenfeldt.
“This is in contrast to public investments, where the shareholder is often the last to know about a problem, long after it is too late to help fix it. Public equity, certainly in the short term, is more subject to the whims of the market, which are great when in your favor, but brutal when they turn. The breakdown of private equity investments across private equity funds, direct investments, and owned businesses is evidence that members are investing in what they know, and using private equity to drive long-term growth in their portfolios.”
Members named Golub Capital as their favorite private equity manager.
Real estate moved from the fourth favorite investment strategy last year to number three, gaining one percentage point to 16%. Residential real estate investments were named most often, followed by commercial investments.
Members named Dome Equities as their favorite real estate managers.
Fixed Income was the fifth most popular investment category at 9%. For the third consecutive year, municipal bonds were the largest fixed income category Members mentioned with exposure through mutual funds, individual names and managed portfolios from advisors.
Commodities gained three percentage points to move to 4% this year. Energy commodities were the predominate investment listed by members.
Cash and Cash Equivalents
Cash and cash equivalents were named by 2% of members as their favorite investment in 2014, the same percentage as in 2013.
“The Member Favorites Survey shows that members currently hold about 11% of their assets in cash, which reflects security concerns, and the desire to have cash if an important opportunity arises. But cash is only the ‚ÄòFavorite Investment’ for 2% of our members. I suspect that cash being a favorite investment for so few members is a leading indicator of what’s on our members’ minds and where they are heading,” said Sonnenfeldt.