Part of the appeal of investing in hedge funds is their inherent exclusivity. If you’ve got money with one, it’s basically shorthand for being rich. For some, they also seem a lot sexier than pedestrian investments like stocks and mutual funds.
Despite this, the dramatic under-performance of hedge funds in recent years has put it in the limelight for all the wrong reasons. They only have one job – to make money for the investor. However, many investors are increasingly unhappy about their mediocre performance, making their high fees (2% of fund’s net asset value, 20% of profit) seemingly unjustifiable.
On the other hand, investors are attracted by the exciting private firms focusing on disruptive technologies or services that could potentially yield significant returns.
As such, investors are shifting their funds from hedge funds to private equity firms. According to UBS data, the average share of alternative assets (mostly, real estate and private equity) in Asian family office portfolios has increased from 41% to 44% in the two years through May 2016. On the contrary, the proportion allocated to hedge funds fell from 6% to 5%.
Michael Preiss, executive director at the Singapore-based Taurus Wealth Advisors Pte multi-family office told Bloomberg that adding hedge funds to his clients’ portfolio was no longer an easy sell. Instead, the ultra-rich families backing the firm today want to put their money directly into technology companies. Taurus has about 10% of client assets allocated to alternative assets. The firm oversees $1.9 billion mainly for wealthy Asian families.
The shift has also been palpable within Golden Equator Capital Pte (GEC), a $500 million Singapore-based multi-family office. Shirley Chua, the founder and CEO of GEC, shared that the share of assets allocated to hedge funds has more than halved to less than 10%, while private equity investments have doubled to 20%.
Chua added that her clients show a particular interest in closely-held U.S. firms focusing on disruptive technologies like car-hailing firm, Uber Technologies Inc or Magic Leap Inc.
Who Should Care About The Shift From Hedge Funds To Private Equity?
1. Business Owners
With increasing amount of dry powder (cash reserve available to deploy) from investors, private equity firms are ever ready to snap up any attractive investment opportunity. This would mean that business owners have greater access to funds and a greater chance of landing successful deals. Of course, assuming that one’s business plan is well thought out.
2. Graduates Who Aspire To Be Portfolio Managers
For graduates who are fixated about becoming portfolio managers in the future, perhaps it is time to reconsider other career aspirations. While it sounds glamorous being a fund manager, demand for fund managers will weaken if hedge funds continue to produce lacklustre results.
In Asia, family offices representing billionaires and multi-millionaires represent a key source of capital, where global pension funds and university endowments have not made large in-roads.
The drastic shift away from hedge funds will likely hit managers seeking money for new hedge funds the hardest.