From the April 2007 issue of Investment Advisor • Subscribe!

High-End Investors Don't Fear Hedge Fund Blow-ups

The large losses of the Amaranth Advisors hedge fund last September and other similar highly-publicized failures are unlikely to deter hedge fund investing by those rich individuals who manage their own portfolios, judging from a survey of the participants in a high-end investors' club called Tiger 21.

These investors also are relatively immune to market shakeouts because they have diversified by moving a large portion of their wealth into private equity, hedge funds, real estate, currency and other alternative investments while keeping another big chunk in bonds and cash.

Tiger, Tiger Burning Bright

Tiger 21 is a group of 115 entrepreneurs, company owners, fund managers and private investors who meet to share their investment insights. They have combined personal investments in excess of $7 billion. The group currently allocates about 35% of its total to various alternatives.

By contrast, they have continued to reduce public equity holdings, which now account for 30% of their portfolios, down from 37% in 2005. This is well below the 50% or higher stock allocation financial advisers typically recommend. (The current composite allocation of IA's asset allocation panel is 58.1% stocks, although the individual range runs from a low of 20% to a high of 80%, see page 34.)

"High-net-worth investors are looking for offerings that can perform independently of conventional market factors," said Tiger 21 founder and chairman Michael Sonnenfeldt in a statement. "The appeal of alternatives has 65% of our members allocating some assets to this class overall."

In the survey, 32% of the members said recent hedge fund losses had no effect on their willingness to invest in the segment, while 38% said such disasters could "somewhat" affect their appetite for future hedge fund investing. Only 10% said recent implosions were likely to reduce their commitment to hedge funds.

"Despite the publicity surrounding failures such as Amaranth, these have been very few in a universe of more than 8,000 funds," Mr. Sonnenfeldt said. He added that people didn't stop buying stocks after Enron and WorldCom

collapsed, and with the right due diligence and shared intelligence, hedge funds represent a viable vehicle for informed investors.

On the other hand, by way of mitigating risks, the Tiger 21 group holds high levels of cash and cash equivalents, which constitute around 9% of their portfolios. This provides a liquidity margin so that they won't need to sell during down markets in assets like equity or real estate.

Another 15% of the club members' investments are in fixed income, covering a wide range from U.S. Treasuries to high-yield bonds. Mr. Sonnenfeldt suggested that on the basis of their hefty cash and fixed-income allocations, Tiger 21 members may appear more cautious than the average investor.

This combination of low-risk bonds and high-return alternatives, sometimes called a barbell structure, is increasingly used by both wealthy individuals and institutional investors.

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