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Affluent Alternative Assets Grow

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CHICAGO (–Affluent investors tripled their total exposure to alternative investments, including hedge funds, in 2002, according to a research report published by Spectrem Group. After quizzing wealthy investors, Spectrem also noted that investors with more than US$5 million net worth increased their reliance on financial advisers, according to the report, called “The Bear Market: The Impact on Affluent Investors and Their Behavior.”

Among those surveyed, 22.3% of assets were invested in alternatives in 2002, up from 0.8% the previous year. Moreover, because wealthier investors use alternatives more, their performance was better. The results “confirmed our suspicions that people are getting a little frustrated with traditional markets,” said Tanya V. McDonald, a director for Spectrem.

The move into hedge funds and other alternatives is part of an overall shift away from individual stock holdings and into professionally managed accounts, an unsurprising move given the poor performance of the stock market. Nonetheless, the number of investors investing in stocks and bonds directly hasn’t fallen; it’s just the allocation to those securities, Ms. McDonald said.

Wealthy investors are particularly attracted to advisers with the Certified Financial Planner designation and haven’t moved away from their use. “They’re still getting value from that relationship,” she said. Because investors with more than US$5 million net worth rely more on financial advisers than stockbrokers, they are more satisfied overall, Ms. McDonald said. That’s caused in part by the diversification benefits of alternatives, which have boosted their returns. During the bull market, those investors were less satisfied with their advisers because performance lagged.

For investors in the survey with US$1 million to US$5 million net worth, the situation is reversed. Previously happy with their advisers–more stockbrokers than financial advisers–they now are less so, because they were less diversified. Brokers serving this market will have to improve their guidance on matters such as asset allocation. “The broker model hasn’t changed yet. It needs to change in order to survive,” she said.

Spectrem’s study did not break out hedge funds from private equity, venture capital or private placements in its questions but did separate real estate.

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