An investment club for the ultra-rich has revealed its Members' are sticking with real estate and private equity amid a dwindling appetite for hedge funds.
A survey by TIGER 21, whose 400 Members count a collective $40 billion in assets under management (AUM) between them, shows a 28 percent average allocation to real estate investments and a 21 percent slice of the portfolio being allocated towards private equity.
Chairman Michael Sonnenfeldt told CNBC Friday that public market assets have largely lost their appeal thanks to quantitative easing pushing their prices up to stratospheric levels and safe havens consequently no longer offering what they say on the tin.
The opportunity to capitalize on individual experience to make a potentially savvier long-term investment is a key part of the appeal of private equity, Sonnenfeldt explained.
"Most of our Members are wealth-creators, first-generation entrepreneurs, so they made their money building small businesses into large businesses. When they sell it, their natural inclination is to roll up their shirtsleeves and invest in another small business because they have the expertise and the tolerance to do that," he said.
"If you had built a printing business as an entrepreneur you might be now an investor in a digital printing business…Everybody has some expertise and if they can lever their individual expertise into their investments they can really create an edge."
Investment bank UBS last week released a report on billionaires which highlighted their total wealth had declined in 2015 by $300 billion to $5.1 trillion while average billionaire wealth fell from $4.0 billion to $3.7 billion. The report's authors blamed costly challenges including the transfer of assets within families, commodity price deflation and an appreciating US dollar for the losses.
In a sub-optimal climate for billionaire wealth expansion, the poor performance of hedge funds over the past year has caused an acceleration in client money deserting some managers. According to figures released Thursday from Hedge Fund Research, $50.1 billion has been withdrawn from the industry so far in 2016.
Sonnenfeldt said this is the continuation of a theme for his Members.
"Hedge funds have come down over a decade from about 12 percent of our portfolios to about 8 percent, so it's been a disallocation or a reallocation away from hedge funds."
"Historically hedge fund returns were correlated to higher interest rates so in a low interest rate environment it's just tougher to get the juice out of them," he added.
However, Sonnenfeldt added that there was still interest in certain strategies including long/short or relative value where he said good returns were possible even in a low interest rate environment.
This sentiment was echoed by Simon Smiles, Chief Investment Officer of Ultra High Net Worth at UBS, speaking to CNBC in conjunction with the release of report on billionaire wealth, who said "People are willing to go into differentiated strategies - the very small handful of differentiated hedge fund strategies and they're willing to pay fees. They're not willing to pay high fees though for relatively generic, leveraged beta type strategies."
"And that money's definitely going into the kind of risk factor, smart beta passive plays," he added.
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