In Depth

Wealth Advisers Counsel Clients On Alternatives

Dec 14 2007 | 10:20am ET

All signs point to an upswing for the hedge fund industry: Recent reports and surveys suggest that investor demand for hedge funds—both individual and institutional—will soar in the next decade.  Wealth advisers are also reading the tea leaves and advising their clients to diversify into the once-misunderstood asset class.

‘Change Is Good’

At a recent gathering of wealth advisers and journalists, the former predicted that the New Year will bring about political and market changes forcing investors to have open dialogues with their wealth advisers.

“We truly are at an inflection point right now, and change is on the horizon,” George Schietinger, a director at Credit Suisse Private Banking USA, says. “Some of those changes are fixed and some are variable. What’s fixed is there’s going to be an election and we’re going to have a new president in place. That’s going to potentially lead to some extraneous variables such as changes in the tax system. We also have some other variables subject to market condition such as the dollar.”

Michael Sawyer, a managing director at Citi Family Office, says U.S. investors are too U.S.-centric and need to diversify into more international stocks and currencies, specifically emerging markets. “Most people have between 10% to 15% exposure to international, but it might not be a bad idea to expand those exposures in different ways,” he says.

“We all talk about the dollar, pound and yen, but there’s a basket of 25 different currencies,” he adds. “We look at diversifying between emerging markets, developed markets and what they’re now calling the ‘frontier markets’. Our firm is very bullish on the international markets for 2008 and we’re directing our clients and assets allocation that way,” he says. 

James Covell, a senior vice president at RBC Dain Rauscher, says change is good and agrees with Sawyer that the overseas markets should be on investors’ radars in the New Year. “Ten or 15 years ago, if you talked about anything international, all you got was, ‘Coca Cola’s got stuff overseas and that’s all I need.’ That was their idea of being international.”

“Like Citi, we think being overseas is very important,” he says. “There are investments that investors can benefit from what you call disasters or opportunities such as subprime. The New Year is going to open the door to a lot of these topics.” 

The Alternative Is Alternatives

Both Schietinger and Sawyer advocate the use of alternative investments for investors looking to diversify their portfolios away from traditional stocks and bonds. Schietinger says he would increase his client’s international portfolios some 3% to 5% through a combination of long/short hedge funds, private equity funds of funds and exchange traded funds.

“We would also employ portfolio managers with expertise in those areas through separately-managed accounts,” says Schietinger, adding that he would counsel his clients to be ready for the volatility that comes with those types of investments.

In the current market environment, investors are wary of managers utilizing leverage and are increasingly gravitating towards funds of hedge funds that provide a safe cover through their multi-manager portfolios, according to Schietinger.

Sawyer claims that hedge funds are a major part of his wealth advisory practice and says that investors can benefit from both upside and downside volatility by having hedge funds in their portfolios.

“Everybody loves upside volatility and you never hear people complaining about being up 15% for the month but there’s also downside such as in August and November. By having alternatives in your portfolios, it cushions the downside and upside. But what it does do is keep that gradual return on an upward scale,” he says, adding that his firm has fared well this year by investing in a manager who was short the subprime market.


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