Asymmetric Investment Returns - Insights into portfolio management beliefs, strategies, and tactics that aim to create a positive imbalance between risk and reward

Stephen Taub writes that "High Net Worth Individuals Pulling Out Of Hedge Funds" in Institutional Investor Magazine, but that Hedge funds have surpassed the magic $2 trillion mark.

The inflows of capital into hedge funds are coming from institutions, not high net worth investors, according to the Capgemini and Merrill Lynch Global Wealth Management 2011 World Wealth Report referenced by the article.

He says:

And in March, Preqin reported a 50 percent rise in public pension plans investing in hedge funds.

But then:

Investors are apparently still spooked from the days of the financial meltdown, when many of their funds of funds investments performed poorly. And many hedge funds gated their assets, preventing them from redeeming.

High net worth individuals are looking for liquidity, confirms William Sullivan, Global Head of Market Intelligence, Capgemini Financial Services. “Their top priority is preserving capital."

1. They defined High Net Worth Individuals as those having investment assets of $1 million or more (excluding primary residence, collectibles, consumables, and consumer durables). In my opinion, that seems low. While $1 million in investment money is a good amount of money, I'm not so sure that would be the minimum for "High Net Worth". I know a lot of people with $1 million invested and most of them don't think of themselves as ""High Net Worth" at that level.

2. What they are doing with their money isn't something you would want to necessarily follow, as they are not necessarily any better informed. It depends on their money manager and advisers. We could examine their performance history to see how informed they are – if they have an advantage. 

3. I’m not sure hedge funds are necessarily a separate asset class. Instead, hedge funds are the structure many portfolio managers choose to offer certain strategies. Those strategies may be a separate asset class. People often consider markets different asset categories (asset classes), but different strategies (or systems) are too. Consider a counter-trend system that buys very oversold markets and sells very overbought markets vs. a Trend following system that buys rising markets and sells falling markets, for example. Those two strategies have very unique risk/return profiles. I operate several different systems across different markets and each of them are non-correlated, meaning their risk and return profile is very independent of the others. Now, today there are some managers claiming their method is "non-correlated" but when you look at their actual performance history it tracks closely to a market index. If it does, it's correlated. It's certainly not a "separate asset class" (category).

4. Finally, I want to define "alternatives". Wikipedia defines alternative investments as: An investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity, hedge funds, venture capital, and financial derivatives. Again, a hedge fund is merely the structure by which the portfolio manager offers an investment program. Some portfolio managers, like myself, may also offer an "alternative" strategy in a managed account structure instead. A managed account is an account titled in the clients own name that is managed by the portfolio manager as part of an investment program. The portfolio manager may manage hundreds or thousands of accounts in the same portfolio that way. With a hedge fund, it could be the same strategy or portfolio, but it's offered by Private Placement Memorandum (PPM) as ownership in a pooled fund, which may be a Limited Partnership (LP) or a Limited Liability Company (LLC). It's mainly a difference in structure. But, many investors prefer a managed account because it provides transparency, liquidity, and because it's their own account held at a third party institution like Trust Company of America or Schwab, they ultimately know where their money is. That, I think, is what attracts many High Net Worth investors with $1 million or more. But, that's not to say hedge funds aren't a good structure, too. There are many reasons why a hedge fund could even be the better structure for some people. But, the term "alternative" is really a reference not only to a product or market, but also a strategy. An alternative strategy is one that is an alternative to the conventional or traditional asset management strategies like index tracking active mutual funds or conventional asset allocation that sets an allocation and re-balances. My managed account program, the Asymmetry Investment Program™, is an example. To learn more, click HERE.