Affluent investors fail to understand hedge funds, says survey

Hedge funds and other alternative investments remain little understood by affluent investors in the US, according to a new report from Spectrem Group, a Chicago-based consultancy firm specialising in the affluent and retirement markets.

The report, entitled Alternative Investments: Are They a Priority for Affluent Portfolios?, draws on telephone interviews with 514 affluent households. It finds that just 18 per cent of affluent investors, defined as having more than USD500,000 in investible assets, say they understand hedge funds.

Structured products are understood by only 15 per cent of affluent investors and private placements by just 19 per cent, according to the report, which says that the lack of knowledge by this group of investors is matched by their lack of interest in alternative asset classes.

Just 9 per cent of affluent investors surveyed by Spectrem said they were interested in hedge funds, while a similar proportion expressed interest in structured products. The report found that 10 per cent were interested in venture capital, 11 per cent in private placements and 11 per cent in futures.

'While hedge funds have been in the news like no other financial product recently, affluent investors still don't feel they understand these alternative investments,' says Spectrem Group managing director Catherine S McBreen.

'This gap in understanding corresponds with a distinct lack of interest in hedge funds and other alternative investments such as structured products and private placements. Financial services providers offering these products need to be proactive in educating affluent investors about their risks and rewards. Given their lack of interest, it seems unlikely these investors will step forward themselves seeking more information.'

Asked which of five specific alternative products they considered the most risky, affluent investors selected hedge funds (39 per cent), followed by commodities (32 per cent), precious metals (14 per cent), private equity (8 per cent) and real estate investment trusts (7 per cent).

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