Hedge funds are no longer a popular investment class among ultra high net worth investors and entrepreneurs, according to data from Tiger 21, a network of wealthy individuals. Over the past 16 years, Tiger 21 members have reduced their allocation to hedge funds from 12% to just 2%. Instead, the largest allocation in their portfolios is now private equity at 29%, followed by real estate investments at 27%, public equity at 19%, and cash at 12%. Tiger 21, which was founded in 1999 by Michael Sonnenfeldt, has 1,300 members who collectively manage over $150 billion in assets.
According to Sonnenfeldt, hedge funds have been in decline for over a decade, with fixed fees becoming less attractive in a low interest rate environment. Hedge funds are actively managed funds that focus on non-traditional assets and employ risky strategies. In recent years, hedge funds have struggled to deliver exciting returns, leading many investors to seek alternative investment options. Tiger 21 members have found that they can achieve better returns with lower fees by investing in index funds such as the Invesco QQQ ETF and SPDR S&P 500 ETF, which have seen impressive gains in recent years.
Global hedge funds returned 13.3% last year, rebounding from a loss in 2022, according to data from investment company Preqin. However, the industry has seen significant net outflows totaling over $217.3 billion between the last quarter of 2014 and the end of 2023. Preqin’s assistant vice president, Charles McGrath, noted that investors have been redeeming capital from hedge funds, despite overall positive returns. A growing number of investors believe that their hedge fund allocations are falling short of their long-term expectations, signaling a lack of confidence in the asset class.
Tiger 21 members have shifted their investment strategies away from hedge funds and towards alternative options such as index funds, private equity, real estate, and cash. By diversifying their portfolios and reducing exposure to hedge funds, these wealthy individuals are aiming to achieve better returns with lower fees and more liquidity. Sonnenfeldt emphasized that hedge funds have become less appealing due to their fixed fees and lackluster performance in recent years. The rise of low-cost index funds and exchange-traded funds has provided investors with viable alternatives that offer attractive returns and greater flexibility.
The decline of hedge funds as a favored investment class among ultra high net worth individuals reflects a broader trend in the industry. Investors are increasingly seeking alternative strategies that offer better returns, lower fees, and greater liquidity. Hedge funds, once seen as a prestigious and exclusive investment option, have lost their allure in the face of changing market conditions and investor preferences. As the investment landscape continues to evolve, wealthy individuals are adapting their strategies to maximize returns and preserve their wealth for future generations. By diversifying their portfolios and exploring new opportunities, ultra high net worth investors are positioning themselves for long-term success in an ever-changing financial environment.
