Ultra Rich Ditch Hedge Funds In ‘06

Jan 18 2007 | 11:40am ET

Is the sky falling for hedge funds?

A new survey of the U.S.’s richest households finds that hedge funds have fallen out of favor with the people who pioneered investing in them: high-net worth individuals. While hedge funds continued to bring in new money last year—primarily from institutional investors—in spite of their myriad troubles, the richest Americans fled, and the richer, the faster.

The Spectrem Group report shows that nearly one-third of households with a net worth of $25 million or more ditched their hedge fund investments in 2006. While 38% of such households invested in hedge funds in 2005, only 27% did so last year. Households with net worths of $5 million or more investing in hedge funds dropped from 17% to 14%.

“Hedge fund investing appears to have lost some of its luster for the very richest Americans,” Spectrem managing director Catherine McBreen said. “A nearly one-third decline in the percentage of those households investing in hedge funds suggests the difficulties of 2006 have made their mark.”

She added, “It will be interesting to see if the industry can restore its popularity among this important segment as 2007 progresses.”

For the shrinking portion of the $25-million-plus group invested in hedge funds, the mean balance with hedge funds was $1.6 million.

It wasn’t only the richest who started losing their taste for hedge funds. The slightly-less affluent $10-million-to-$25-million person also cut his exposure, although only fractionally. In 2006, 18% of such households had hedge fund investments, compared to 19% in 2005. The practically poverty-stricken $5-million-to-$10 million group actually saw their numbers in the hedge fund investor ranks grow, to 8% from 6%.

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