People still want them, but want to see more of what goes on under the
hood. Recent headlines suggest that private investors have had it with hedge funds. But other evidence points to a subtler conclusion: though no longer hailed as a guarantor of unending returns, these expensive and often opaque vehicles have become, and seem likely to remain, permanent fixtures in ultra-high-net-worth portfolios.

Hedge-fund assets doubled to over $2 trillion between 2005 and 2008, according to BarclayHedge; but by late last year losses and redemptions had brought hedge-fund assets under management back down around the $1-trillion mark.

Hedge funds shed a record 21.44% of their value in 2008, says BarclayHedge's
Barclay Hedge Fund Index. Although some hedge funds did well -- especially short-bias plays, and for obvious reasons -- and the S&P 500, a gauge of large U.S.-listed company performance, gave up a good 40% last year, individual hedge-fund blowups and lock-downs -- to say nothing of a spectacular case of alleged fraud at year end -- has contributed to a sense of panic in hedge-fund circles that rivals the fear gripping traditional-investing milieus.

Within days of Bernard Madoff's initial appearances in the press as the subject of a fraud investigation in mid December 2008, Tiger 21, a New York-based association of 160 wealthy investors, was out with the astounding news that its members had trimmed their collective hedge-fund exposure by an astounding 75%.

More institutional

But other sources paint a more nuanced picture. Ultra-wealthy investors have been trimming hedge-fund and fund-of-fund exposure since the fall of 2006, according to surveys by the Institute for Private Investors (IPI), a New York-based education and networking resource for ultra-wealthy families. The latest IPI survey -- conducted in the fall of 2008 -- suggest there's less inclination than ever to put new money in hedge funds, but there's little indication of an exodus similar to the Tiger 21 retreat. Again, recent IPI data suggest a return to relatively more "traditional" assets -- but no one is suggesting that hedge funds be abandoned altogether.

(Incidentally, though a recent survey by Chicago-based market research firm business consultancy Spectrem Group suggests that U.S. households worth $1 million or more (primary residences aside), saw their assets decline by an average of 30% last year, IPI members -- a group of 365 mostly centa-millionaire families --expected their average full-year investment losses of about 17% for 2008.)

This view of hedge funds and other alternatives as permanent fixture of the ultra-high-net-worth investing landscape is reflected in attitudes among institutional investors.

In surveys conducted in August and November 2008 in the U.S. and Europe, investment processor SEI shows that more than 90% of institutions polled either increased or maintained their allocations to hedge funds in the last two years.

This sentiment was unchanged in November when three out of four investors re-surveyed said they had taken "no action" in response to the crisis. Asked why, 83% of those taking no action indicated their commitment to hedge funds has remained unchanged. The remaining respondents had investments that were subject to lock-up provisions. At the same time, while the percentage planning to increase target allocations dropped significantly between the first- and second-round surveys (signaling a period of reassessment), only one institution reported lowering its target-hedge fund allocation between the first and second rounds.

"Institutions appear committed to hedge funds as an asset class," says Phil Masterson, Managing Director of SEI's Investment Manager Services division. "However, it's not an unconditional commitment. Hedge fund managers must recognize and react to the changing expectations of their institutional clients. Greater transparency and enhanced client reporting and communications -- along with fulfilling investor performance expectations -- will be the pillars of a hedge-fund manager's success." -FWR

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