From the September 2008 issue of Investment Advisor • Subscribe!

Mass Satisfaction:

Wealthy Like the Alternatives

A recent survey shows that well-off Americans have significant holdings in alternative investments, with that category broadly defined to include real estate, private equity, and hedge funds--and are more satisfied with the performance of those alternatives than they are with traditional assets.

The survey, sponsored by Bank of America, was of individuals with more than $3 million in investable assets. They were much more likely to be in hedge funds--of the 400 people studied, 92 were invested in hedge funds or funds of funds and 267 reported having some other alternative investment.

The population of individuals with $3 million-plus represents the largest segment of high-net-worth investors investing in alternatives, explained David Bailin, president of Bank of America Alternative Investment Solutions.

This group is receiving more professional advice than ever before, including facts regarding the benefits and risks of alternatives, advice as to building diversified portfolios, and access to great managers, Bailin suggested. "They are getting more asset classes and more diversification, which in this market environment is really valuable," he said.

The Danger of Imitation

The investors expressed greater satisfaction with alternatives compared to traditional investments. That is in part due to current conditions. Recent market turbulence appears to have affected hedge funds less than expected, despite news reports of hedge fund disasters, as Hammond Associates pointed out in a recent report.

This result supports an investment model pioneered by big university endowments such as Yale, which have long used a wide range of alternatives to boost performance. But merely imitating Yale after the fact can be hazardous as markets change.

Clearly, some individuals have found alternative investments that fit their needs. In the Bank of America survey, only 30% were satisfied with the traditional part of their portfolio, but 51% were satisfied with their hedge funds. Also, 44% were satisfied with venture capital, 41% with real estate, and 35% with private equity.

Experience = Satisfaction

Those with 10 or more years of experience in alternatives were almost twice as likely to be "extremely satisfied" with their total portfolio compared to those with less experience.

"The longer people have been investing in alternatives, the more satisfied they are and the more they understand the real risk," Bailin said, adding that experience tempers the perception of risk and this allows the alternatives industry to grow.

But the broader public, unlike investors with some experience, tends to perceive hedge funds and other alternatives as highly risky. "The level of satisfaction for people invested in alternatives is far higher than the general public might have thought and much higher than with traditional investments," Bailin concluded.

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