Wealth managers place hedge funds at the low-risk, low-return end of the alternative investment spectrum while private equity is seen as high-risk, high-return, according to new research from Scorpio Partnership.
Scorpio says the findings highlight the growing importance of defensive hedge fund strategies in client portfolios.
The firm surveyed senior investment professionals from 22 international wealth management firms with combined AUM of US$5.7 trillion. Participants included universal banks, private banks, private client asset managers, multi-family offices and single family offices.
The survey, sponsored by LPEQ (the European listed private equity trade body) and carried out between April and June 2011, also found that 84% of respondents expect to increase their allocations to Asia Pacific markets in the next 12 months while 33% are looking to boost their allocations to both Latin America and the Middle East and North Africa.
Scorpio says 40% of respondents intend to increase their equity allocations in the next 12 months, even in their most conservative portfolios while 31% of wealth managers expect to boost allocations to alternative assets in the coming months.
On the other hand, 41% of respondents, fearing inflation and the effects of sovereign debt problems, are reducing their exposures to fixed income and cash allocations are also on hold or declining.
“Complex economic and market factors are forcing wealth managers to reassess how they generate above average returns for their private clients over the longer term with solid downside protection and an inflation hedge.
“Many recognize that emerging markets and equity markets offer an attractive source of investment return, but with heightened volatility, persistent concerns about the robustness of the recovery and frontier market fears, managers need effective strategies to counterbalance the associated risks. It is therefore not surprising that we are seeing an increasing allocation to alternative investments – particularly hedge funds – as inflationary concerns hit the bond and cash markets,” says Catherine Tillotson, managing partner of Scorpio Partnership.