Private investors crowded out as hedge funds grow

ZURICH: The world’s super-rich will soon become marginal financiers in the hedge fund industry as the business they invented is increasingly dominated by large institutional investors, fund managers say.

Billionaires and other individuals rich enough to spend most of their time nurturing their bank accounts are still pouring more money into the industry, which uses sophisticated financial strategies to aim for high and sustained returns.

But inflows from pension funds, endowments and companies are rising faster, reducing private investors to a minority now that the industry, at an estimated $1 trillion of assets, has become sizeable enough to swallow institutional investments.

Just five years ago, the overwhelming majority of the then $500 million of assets managed by hedge funds were from wealthy individuals, said Tanya Styblo Beder, who runs a hedge fund called Tribeca Global Management LLC.

“If we go forward to the year 2010, it’s estimated that 80% of the assets under management in the hedge fund will be from institutions. So it’s a big switch that’s happening,” she said.

Hedge funds first became popular as early as the 1960’s, when wealthy individuals used innovative financial tactics like short-selling and leverage to create returns they could not match in conventional trading.

Research confirms that such investors are no longer in the majority, with data provided by IFS, a UK financial lobby, showing 44% of the assets in the industry came from wealthy people in 2004, down from over 60 percent in 1996.

The difference is even more telling when looking at inflows into hedge funds — a more precise measure of investor appetite.

In 2004, institutions signed up for roughly 30% of inlows, a number expected to rise to 50% by 2008.

Less sophisticated private investors may have lost interest in hedge funds however, as the sector has shown meagre returns in the last two years, with bullish equity markets pre-empting the need to hedge against bear markets.

Such high net worth individuals typically still have millions to look after and were often lured into buying alternative investment products by their banks in the heyday of the industry just a few years ago.

Private investors are typically more fickle than institutions such as pension funds, fund managers say, shifting assets rapidly in search of higher returns.