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Banking

Is there room at the hedge fund table?

Can the traditionally close relationship between private banks and hedge funds survive growing inflows of new money from institutional investors with huge volumes of funds to allocate and a less agile investment process?

Chambers: the industry can
absorb additional flows from
institutions without
degradation of returns


UNTIL THREE YEARS ago, high-net-worth individuals were almost the sole investors in hedge funds. Their relative sophistication, risk appetite and flexibility compared with institutional counterparts resulted in an affinity with hedge funds. Now, however, high-net-worth individuals account for less than 75% of hedge fund assets and in three years' time their share could be below 60%.

It is not that the wealthy are removing money from hedge funds – indeed, their inflows are increasing. Rather, institutional investors, such as pension funds and endowments, have steadily been introducing hedge funds to their portfolios. They now hold about 25% of the $800 billion of assets in the sector. And it's only the start.

"The hedge fund industry is still at the adolescent stage," says Doug Wurth, head of investment solutions for Europe and Asia at JPMorgan Private Bank. "We could easily double the current amount of assets in three years' time. There's an awakening of the institutional giant here. If you assume institutional investors allocate just 5% to hedge funds, you'd have a quantum leap in terms of the number of hedge fund assets.

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