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Wealth management: Where has all the vol gone?

Ultra-rich investors are seeking out higher-volatility hedge funds. But they will be hard to find until strategies catch up with demand.

Ultra-high-net-worth clients are becoming more amenable to hedge funds pursuing higher-volatility strategies, say private bankers and hedge funds catering to family offices. “From discussions we have been having with family office and high net-worth clients, it is clear that there is a trend towards accepting funds with higher vol as they look for higher returns,” says Nancy Lee, a director at hedge fund ValueWorks.

As opposed to market-neutral strategies that target 0% market exposure by putting on equal amounts of longs and shorts, or by shorting the index, Lee says ValueWorks’ strategy aims for 100% market exposure using targets of 80% to 150% on the long side and 0% to 35% on the short side. The shorts are designed to lower overall market exposure but, more specifically, to offset excess long market exposure. Since October 1999, her fund has produced 17.46% in annualized returns.

Unavoidable constraints

“There is a sense that some investors feel constrained by lower volatility but in the case of institutional investors there is little they can do,” Lee says. “Funds of hedge funds are catering to these with market-neutral and low-vol strategies. But 67% of investors in hedge funds are high-net-worth individuals and families that are looking for funds that are prepared to make the jump and offer higher vol for higher returns.”

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