Wealthy families are cooling on hedge funds except in one area

Still bullish.
Still bullish.
Image: Reuters/Eduardo Munoz
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Family offices that manage estates and investments for the wealthy are backing away from hedge funds for a second year in a row, citing worries about the funds’ ability to generate strong returns, according to a report by UBS and Campden Research. One exception may be for investments in so called “quant” funds that use advanced mathematics and computing to make money through trading.

Multi-year participants in the survey are allocating about 7.1% of their investments in hedge funds this year, down from 8% in 2016. Overall, about 30% of family offices expect to reduce their investments in hedge funds even further in the coming years.

“Similar to some of our peers, we are leaving the hedge fund space,” according to a European family office executive in the report, whose name wasn’t disclosed. “The returns have dropped massively. I think there is a growing resentment to pay fees for the poor 2% or 3% returns.”

Traditionally, hedge funds have charged a 2% management fee as well as a 20% performance fee. That structure is under pressure (paywall) as returns slip. The Alignment of Interests Association (AOI) represents investors like endowments, pension funds, and family offices, and it has argued the hedge fund compensation model needs to change.

Family offices typically handle key family assets and investments. There are about 5,300 of them around the world, according to Campden estimates, with staff sizes ranging from one or two employees to 100 or more.

Quant funds saw increased interest, as family offices boosted their exposure to the strategy to about 6.4% of their hedge fund holdings. Including all types of investors, not just family offices, computer-driven hedge funds have increased their assets under management (paywall) to $932 billion as of March, following eight straight years of inflows since 2009, according to data-tracking firm HFR.

But there are signs that even those returns are stumbling (paywall). Neal Berger, the founder and chief investment officer of Eagle’s View Asset Management, told Bloomberg News that returns have been slipping for a year, suggesting the rest of the market has figured out some of the winning strategies. The $500 million fund-of-funds has about half of its allocation in quant funds.

As more money managers enter the quant-trading sector, strategies and signals are being replicated more quickly, Karim Cherif, senior hedge fund strategist at UBS, said in an e-mail. Fortunately, broker data signals little overlap between quant-fund portfolios, Cherif said, suggesting there’s little risk of a repeat of the so-called “quant quake” in 2007, when the strategy had become crowded with investors and a chain reaction of selling broke out.