Hedge funds are ‘useless as a doornail’ for the ultra-rich, says Tiger 21

Hedge funds are “useless” as an funding class for the tremendous wealthy, mentioned Michael Sonnenfeld, founder and chairman of Tiger 21 — a community of extremely excessive internet price traders and entrepreneurs.

Tiger 21 members’ allocation to hedge funds dropped to 2% from 12% over the previous 16 years, information from the community confirmed.

“Hedge Funds are useless as a doornail — sustaining a gradual place at 2% as members have restricted their funding on this sector during the last a long time,” Sonnenfeldt mentioned, including that traders might get an identical publicity with much less charges by investing in index funds, or going into personal fairness.

At the moment, personal fairness takes up the biggest allocation of Tiger 21 members’ portfolio at 29%, adopted by actual property investments at 27%. Public fairness holds round 19%, whereas money round 12%. Hedge funds have a 2% allocation. 

Tiger 21 has 106 teams in 46 markets. The community has 1,300 members, largely first-generation wealth creators who collectively handle over $150 billion price of property. They’re additionally largely entrepreneurs who’ve bought their corporations and need to protect their wealth.

Members of the group, which was arrange in 1999 by Sonnenfeldt, obtain and share recommendation with one another on wealth preservation, investments and philanthropic endeavors.

“Hedge funds have been in decline for over a decade. In a low rate of interest atmosphere, the mounted charges grew to become much less engaging,” Sonnenfeldt instructed CNBC through electronic mail, including that hedge funds might now not “ship thrilling returns.”

Hedge funds are actively managed funds with a concentrate on non-traditional property and make use of dangerous methods. Hedge fund returns have been discovered to rise with greater rates of interest. 

“Our members realized they may do higher on common with extra publicity to index funds just like the QQQ and SPYs with extra liquidity and fewer charges, and sure greater returns during the last decade,” Sonnenfeldt mentioned.

The Invesco QQQ ETF, an exchange-traded fund that tracks the efficiency of the Nasdaq-100, rose 55% in 2023. SPY, which stands for the SPDR S&P 500 ETF, gained virtually 25% final yr. 

World hedge funds returned 13.3% final yr, rebounding from -6.8% in 2022, in keeping with information from funding firm Preqin.

Between the final quarter of 2014 and the top of 2023, the business has seen internet outflows of greater than $217.3 billion, mentioned Charles McGrath, assistant vice chairman at Preqin’s Analysis Insights.

“The hedge funds business has been in a malaise for a lot of the previous decade, with traders persevering with to redeem capital from the asset class, offsetting total optimistic returns,” he wrote in a latest report.

Preqin highlighted {that a} rising share of traders assume their hedge fund allocations fall in need of long-term expectations.