Family Offices Souring on Hedge Funds: Infovest21

High fees and conflict-of-interest concerns dampen investors’ enthusiasm

Family offices allocated about 21% of their portfolios to hedge funds in 2012, but their enthusiasm for these alternative investments has ebbed, according to a new survey from Infovest21.

The survey of single- and multiple-family offices and foundations found that hedge funds received the second-largest asset allocation behind equities.

However, investors’ allocations were down from an average of 26% in 2011 and 32% in 2010. Moreover, hedge funds’ favorability ratings plummeted to 22% in 2012 from 64% last year.

Allocations to funds of hedge funds increased to 2.9% from 1% last year, but were considerably off the 9% allocation in 2010.

Infovest21 interviewed primarily U.S.-based groups with an average asset size of $1.6 billion during July and August. Twenty-six percent of respondents had been investing in hedge funds and funds of funds for more than two decades.

Investors said they selected managers based primarily on their integrity, performance and edge in investment process, according to the study. Respondents invested in 19 hedge fund managers on average in 2012, compared with 23 in 2011.

Fifty-six percent of the families surveyed allocated to equity long/short strategies in 2012, while 37% allocated to distressed and 33% each to event-driven and fixed-income arbitrage strategies.

More than one-third of the respondents said they used ’40 Act mutual funds, and another 7% were considering them. Their main reservation about mutual funds was that managers were of lower quality than hedge fund managers.

Family offices’ chief concerns about hedge funds were high fees and whether managers’ interests were aligned with those of their investors. Respondents paid an average 1.5% management fee and 14.6% incentive fee to hedge fund managers, and 0.7% and 4.3%, respectively, to fund-of-funds managers.

Differences among single-family offices, multiple-family offices and the foundations emerged in the survey. Some 40% of single-family offices had been investing with hedge funds for at least two decades; of those, 17% had been investing for more than 30 years.

Single-family offices also had a more negative view of hedge funds than the other respondents, according to Infovest21. Seventeen percent did not like hedge funds at all, while another 8% were somewhat negative.

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