Are hedge funds dead? Decoding where ultra-wealthy are investing right now

 In recent years, private equity has toppled real estate as the largest allocation for the world's ultra wealthy, according to a report by TIGER 21, a premier organization for ultra-high-net-worth individuals.
 

Hedge funds are “dead” as an investment class for the super rich, said Michael Sonnenfeldt, founder and chairman of Tiger 21,  a network of ultra high net worth investors and entrepreneurs.Tiger 21 members’ allocation to hedge funds dropped to 2% from 12% over the past 16 years, data from the network showed.

Currently, private equity takes up the largest allocation of Tiger 21 members’ portfolio at 28%, followed by real estate investments at 26%. Public equity holds around 22%, while cash around 12%. Hedge funds have a 2% allocation. 

 

 Real estate was king for the prior 15 years, because so many members created their wealth in the real estate arena. The long bet is now on private assets, with public assets down to just 22% among members, and with a growing concentration of indexes and exchange-traded funds, even within the shrinking public equity allocation.

The TIGER 21 Asset Allocation Report measures aggregate asset allocations (on a trailing 12-month basis) of Members based on their individual annual portfolio defense presentations.

TIGER 21 Member Allocation (Q3 2023–Q2 2024)

Source: Henley and Partners

Key Findings:

•  Private equity has surpassed real estate as the largest allocation for TIGER 21 members, reflecting a growing preference for illiquid assets.
•  Members are actively seeking out high-growth opportunities, particularly in emerging sectors like technology and consumer.
• Hedge fund allocations have dropped significantly, with many members opting for index funds instead.
• The rise of AI has sparked interest among TIGER 21 members, with many investing in tech giants like the Magnificent Seven.
•  While real estate remains a significant allocation, members are becoming more selective, focusing on last-mile opportunities and avoiding office and retail spaces.

The current artificial intelligence (AI) revolution has provided an opportunity for investors in the public markets with the group of large American tech firms known as the Magnificent Seven, namely, Apple, Microsoft, Amazon, NVIDIA, Meta, Alphabet, and Tesla. TIGER 21 Members’ interest in public equities has grown by 3% in the last year, although a significant portion of this is simply a reflection of the rise in the public markets.

A recent survey showed that 43% of Tiger 21 members are investing in NVIDIA, with 57% expecting that the firm’s success will last for the next decade. In recent years, investing in the Magnificent Seven has offered a unique opportunity to invest in AI by buying shares in the top technology companies and. whether AI succeeded or failed, what was left of each company was still a world-class technology leader with almost endless possibilities. 

Previously, to play a new high-tech opportunity you had to invest in a small company that was so dependent on one innovation that there was little left of the investment if it failed.   

"To reflect on these trends, public equities offer some benefits such as liquidity, transparency, regulatory oversight, and lower fees, while superior returns were historically gained in the illiquid private equity markets. However, the outperformance of the Magnificent Seven has been extraordinary. Periods like this have occurred in the past, but now, the outperformance has largely been concentrated in these seven unique tech stocks. Simply put, they have driven the markets," said Sonnenfeldt.

Changes in real estate investment

After occupying the number one spot for 15 years, real estate is now the second-largest allocation of Members’ portfolios at 26%, having been surpassed by private equity. Members see opportunities in last-mile real estate but there is less interest in the office and retail space. 

"Because our Members can invest directly in distressed opportunities and often have created their wealth as developers, they are better able to leverage the opportunities available in the current dynamic real estate markets. Whereas a seller might be trying to offload an underutilized office building, nimble investors may see that as a future residential or hotel offering where the renovation costs can create an attractive financial opportunity, dynamic change creates winners and losers, and for those prepared the opportunities can be compelling," said Sonnenfeldt.

Decline in hedge fund investment

TIGER 21 Members’ allocation to hedge funds dropped to 2% from 12% over the past 16 years.

Hedge funds are ‘dead’ — maintaining a steady position at 2% as many members have limited their investment in this sector. Many investors think the risk-adjusted, after-fee returns are simply better in index funds.

What’s ahead?

Despite many mixed signals in the economy, the Tiger 21 Members are heavily invested ‘long’ with 76% of their portfolio in real estate, public equity, and private equity. Over the last 15 years, the increase in private equity asset allocation has been dramatic but, anecdotally, members believe venture capital offers the largest growth within the private equity sector. 

"Starting businesses is how most TIGER 21 Members created their wealth, averaging about 1 in 10,000 by accomplishment, and they have honed skills that can give them a leg up when investing in new businesses. Members want to invest directly where they can in businesses with huge potential, and this is precisely where their unique backgrounds provide experience and insights that they believe give them an advantage. This is one of the best ways for entrepreneurs to become better investors after they sell a business," said Sonnenfeldt . 

A report by Henley & Partners, using data from New World Wealth, released on Tuesday revealed that United States is home to one-third of the world's centi-millionaires, or people with liquid assets of $100 million or more, but the consulting firm argues election uncertainty, including a Democratic proposal to tax unrealized capital gains, may lead some people to move.