For the Ultra-Rich, the Go-to Asset Class Remains Real Estate

Amid a dwindling appetite for hedge funds the ultra-rich are sticking with real estate and private equity, an investment club for the ultra-rich has revealed this about its members.

A 28 percent average allocation to real estate investments and a 21 percent slice of the portfolio being allocated towards private equity, shows a survey by TIGER 21, whose 400 members count a collective $40 billion in assets under management (AUM) between them.

Thanks to quantitative easing pushing public market assets prices up to stratospheric levels and safe havens consequently no longer offering what they say on the tin, they have largely lost their appeal said Chairman Michael Sonnenfeldt told CNBC.

Sonnenfeldt explained that a key part of the appeal of private equity is the opportunity to capitalize on individual experience to make a potentially savvier long-term investment.

“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,” he added.

While average billionaire wealth fell from $4.0 billion to $3.7 billion, their total wealth had declined in 2015 by $300 billion to $5.1 trillion, highlighted a report on billionaires by investment bank UBS released last week. Factors like transfer of assets within families, commodity price deflation and an appreciating US dollar were the costly challenges that were responsible for the losses, noted the report’s authors.

An acceleration in client money deserting some managers has been caused by the poor performance of hedge funds over the past year in a sub-optimal climate for billionaire wealth expansion. $50.1 billion has been withdrawn from the industry so far in 2016 according to figures released Thursday from Hedge Fund Research.

This is the continuation of a theme for his members, Sonnenfeldt said.

“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,” he said.

“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.

Good returns were possible even in a low interest rate environment in certain strategies including long/short or relative value and there was still interest in such strategies, Sonnenfeldt added.

“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,” said  Simon Smiles, Chief Investment Officer of Ultra High Net Worth at UBS,

(Adapted from CNBC)


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