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Private banks seek new alternatives

Wealth managers are muscling in on the fund of hedge funds business.

High-net-worth individuals dissatisfied with their private banks’ meagre offerings of alternative investments have in the past turned largely to funds of hedge funds. But a recent shift by some private banks to develop portfolios of hedge funds threatens to draw those assets back to the original gatekeepers.

Private banks have often struggled with the idea of dropping in-house investment management of traditional assets such as bonds and equities for a truly open-architecture, third-party approach. But they have understood that, although clients might buy the notion that they have in-house expertise in traditional assets, no one would be convinced of any but the most exceptional private bank setting up its own hedge funds in-house.

Furthermore, the private banks could not afford to do so. Their solution has therefore been to focus on building up teams of researchers or using third-party research to select hedge fund managers and construct portfolios of hedge funds for high-net-worth clients. It’s becoming a more convincing method of investing in hedge funds than via a fund of hedge funds.

There is some anecdotal evidence to suggest that the performance of the private banks’ hedge fund portfolios has rivalled that of funds of hedge funds and there is a clear advantage in this portfolio approach for investors from the lower fees being charged for them.

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