Super rich abandoning hedge funds, UBS report says

Andrew Boyers/Reuters

• Super rich families are increasingly turning their backs on hedge funds, with the amount of money invested by family offices dropping for a third consecutive year.
• According to UBS’ annual survey of family offices, hedge funds now account for just 5.7% of all investments in the sector.
• “Amid concerns over weak performance and relatively high fees, allocations to hedge funds declined for at least the fourth consecutive year,” the Global Family Office Report said.
• Away from hedge funds, family offices favored developed market equities, private equity funds, and developed market bonds over the last year, the report said.

The world’s super rich are increasingly turning their backs on hedge funds, with the amount of money invested by family offices dropping for a third consecutive year, according to Swiss bank UBS.

According to UBS’ annual survey of family offices hedge funds now account for just 5.7% of all investments in the sector.

Family offices, at their simplest, are the private office for a family of significant wealth. This can be through an individual company set up to deal with the finances of a single family, or part of a larger business. HSBC’s private office, for example, manages more than $130 billion of assets for 340 families, according to Bloomberg. 

“Amid concerns over weak performance and relatively high fees, allocations to hedge funds declined for at least the fourth consecutive year,” the Global Family Office Report said.

Worryingly for hedge funds, the pace of falling family office allocations is accelerating, with a more than 3% decline over the last 12 months.

“Whilst allocations last year dropped a moderate 0.9 percentage points, this year they sped up, declining 3.2 percentage points to bring the average hedge fund portfolio allocation to just 5.7%,” the report noted.

The most basic driver behind the move away from hedge funds by family offices is simply that they’ve not made a lot of money for their clients, pushing investors to look elsewhere.

“Less-than-desirable returns over the past several years, amplified by market volatility, has not played in the favor of hedge funds,” UBS notes.

“Having been outperformed by private equity and equities investments, investors continue to avoid extensively diversifying through hedge funds.”

UBS then goes on to quote the unnamed CEO of a family office in North America, who provides the following reasoning for the fall in allocations by family offices to hedge funds: “If you look at hedge funds over the last five to eight years, they offer much lower returns than the rest of the market. The purpose of a hedge fund is to limit your downside risk, but you’re not going to get the upside as well.” 

While hedge fund allocations have dipped, there’s some hope on the horizon, with UBS saying that hedge fund allocations by family offices “should remain somewhat consistent” over the next 12 months.

“While 15% of those surveyed said that they will decrease their investments into hedge funds, a slightly larger proportion, 21%, said that they will increase them,” the report said.

Away from hedge funds, family offices favoured developed market stocks, private equity funds, and developed market bonds over the last year, the report said. Cash and agricultural commodity investments were the only other categories to suffer falling allocations, UBS said.