ULTRA-WEALTHY SHIFT BIG FROM HEDGE FUNDS TO PRIVATE EQUITY
By Rachael Levy
Big dollar individual investors have been making a long-term reallocation from hedge funds into private equity, says Michael Sonnenfeldt, founder of Tiger 21.
The following text is a transcript of a portion of a speaker’s presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view ofFundFireor any other group. Source: FundFire Alts, Dec. 17, 2015
Rachael Levy, Reporter, FundFire Alts
“Hi. This is Rachael Levy. I’m a reporter here at FundFire Alts. I’m here with Michael Sonnenfeldt, the founder of TIGER 21. Michael, why are members of your peer-to-peer network moving their investments from hedge funds to private equity?”
Michael Sonnenfeldt, Founder, TIGER 21
“The shift from hedge funds to private equity has been one of the large shifts over the last decade. Private equity has gone from low teens, maybe 12%, up to the high teens and as high as 20% of allocations and hedge funds have fallen in the same time, from low teens to now 8%. So, hedge funds have gone down as the private equity allocations have gone up.
“I think the main reason is our membership are some of the best entrepreneurs in North America who have sold their businesses and then, come together in our organization. They meet once a month and learn from one another. We’re not a good sample of all people of similar wealth. We’re a sample of entrepreneurs who have created their wealth through private equity primarily and once they sold their assets, or their businesses and they were wondering what do they do in this low interest rate environment, it’s not surprising that they kind of went back to basics, went back to what they know best, which is creating, running, managing and helping to grow small businesses, both here and in Canada and elsewhere.
“In some sense, the rise in private equity is going back to basics, but also a lot of our members found that in 2008, they were involved in different securities that were more complex than they understood. They had been sold these securities by various brokers or intermediaries who didn’t understand the risks and in the crisis of 2008, those risks became painfully obvious when members sustained losses that they had not anticipated.
“So, part of the reduction in hedge funds and the growth in private equity is sort of a back-to-basics, back to what you know. Making money the hard, like good old way of one step at a time, building businesses that people like the services from.”
“Do you think that this year, in particular, has had any effect on how the people within your network essentially are deciding to move away from hedge funds? Hedge funds, as we know, haven’t had a great year this year.”
“Right. I think they’ve had a bad year this year. I think hedge funds have correlations to interest rates and hedge funds typically, one of the determinants of hedge funds as a whole is a spread off of the risk-free rate and as interest rates have continued to fall, hedge funds have perceived to become riskier as their returns have fallen.
“So, I think it’s sort of the same phenomenon of even though here we’re just sitting with the first Fed hike in a decade, it’s still a relatively small number and I think the general sense is that hedge funds are delivering less today than they have in the past. Of course, there are some great hedge funds, just like there are some great stocks, but finding them is getting tougher and tougher.”
“Michael, thank you so much for stopping by. I really appreciate your time.”
“Thank you for having me.”