HNWIs cool on allocation to hedge funds

Allocation to hedge funds from high net worth individuals (HNWIs) slipped to 9% in 2007 from 10% in 2006.

In early 2007 HNWIs bet heavily on riskier asset classes. However further into the year, financial market turmoil and economic uncertainty intensified and HNWIs began to shift their investments to safer, less volatile asset classes.

Exposure to property and hedge funds was reduced in favour of safer investments, according to the “World Wealth Report” from Merrill Lynch and CapGemini.

An increasing proportion of hedge fund assets are coming from institutional investors instead of wealthy clients. This is shifting the main drivers of the industry’s growth.

“This year’s report found that the number of high net worth individuals, and the amount of wealth they control, continued to increase in 2007, with the greatest wealth being created in the emerging markets of India, China, and Brazil,” said Nick Tucker, market leader for the UK and Ireland, global wealth management arm at Merrill Lynch.

Hedge fund returns outperformed traditional stock indexes in 2007, boosted by 20.3% average gains in emerging markets. The global economy grew by 5.1%, down slightly from the 5.3% in 2006.

The largest regional growth in HNWIs occurred in the Middle East (15.6%), Eastern Europe (14.3%) and Latin America (12.2%).

India led in HNWI population growth at 22.7% and China experienced the second largest expansion of a HNWI population advancing 20.3%.

The report predicted that global HNWI wealth will grow to $59.1 trillion by 2012, advancing at a rate of 7.7% a year. Merrill Lynch estimated the total wealth controlled by rich people in Asia to overtake that in Europe by 2012.

The balance between emerging market strength and mature market recovery will persist through 2008, according to the report. The short-term outlook remains volatile.