Hedge funds are ‘dead as a doornail’ for the ultra-rich, says Tiger 21

Hedge funds are “dead” as an investment class for the very rich, said Michael Sonnenfeld, founder and president of Tiger 21, a network of ultra-high-net-worth investors and entrepreneurs.

Tiger 21 members’ allocation to hedge funds has fallen from 12% to 2% over the past 16 years, according to network data.

“Hedge funds are dead as nails – they maintain a stable 2% position because their members have limited their investments in this sector over the past decades,” Sonnenfeldt said, adding that investors could get similar exposure with less fees when investing in index funds. , or get into private equity.

Currently, private equity occupies the largest share of Tiger 21 members’ portfolio at 29%, followed by real estate investments at 27%. Public stocks hold about 19%, while cash holds about 12%. Hedge funds have a 2% allocation.

Tiger 21 has 106 groups in 46 markets. The network has 1,300 members, mostly first-generation wealth creators who collectively manage more than $150 billion in assets. They are also mostly entrepreneurs who have sold their business and are seeking to preserve their assets.

Members of the group, established in 1999 by Sonnenfeldt, receive and share advice on heritage preservation, investments and philanthropic efforts.

“Hedge funds have been in decline for over a decade. In a low interest rate environment, fixed fees have become less attractive,” Sonnenfeldt told CNBC by email, adding that hedge funds could no longer “generate attractive returns”.

Hedge funds are actively managed funds focused on non-traditional assets and employing risky strategies. Hedge fund returns have been found to increase as interest rates rise.

“Our members realized they could do better on average with greater exposure to index funds like QQQ and SPY with more liquidity and fewer fees, and likely higher returns over the past decade,” Sonnenfeldt said.

The Invesco QQQ ETF, an exchange-traded fund that tracks the performance of Nasdaq-100, increased by 55% in 2023. TO SPY, which stands for SPDR S&P 500 ETF, gained nearly 25% last year.

Global hedge funds returned 13.3% last year, up from -6.8% in 2022, according to data from investment firm Preqin.

Between the last quarter of 2014 and the end of 2023, the sector saw net outflows of more than $217.3 billion, said Charles McGrath, assistant vice president of Preqin’s Research Insights.

“The hedge fund industry has been in a malaise for much of the last decade as investors continued to repurchase capital from the asset class, offsetting overall positive returns,” he wrote in a recent report.

Preqin pointed out that a growing number of investors believe their allocations to hedge funds are not meeting long-term expectations.