Miami, Florida – Hedge funds are losing their appeal among high-net-worth investors, according to Michael Sonnenfeldt, founder and chairman of Tiger 21, a network of ultra-wealthy individuals and entrepreneurs.
Over the past 16 years, Tiger 21 members have drastically reduced their allocation to hedge funds from 12% to just 2%. Sonnenfeldt described hedge funds as “dead as a doornail” in the eyes of his network’s affluent members.
Instead of hedge funds, these high-net-worth investors are turning to other investment vehicles like index funds and private equity. Currently, private equity holds the largest share of Tiger 21 members’ portfolios at 29%, followed by real estate investments at 27%, public equity at 19%, and cash at 12%.
The Tiger 21 network, which was established in 1999 by Sonnenfeldt, comprises 1,300 members across 106 groups in 46 markets. These members collectively manage over $150 billion in assets, mainly consisting of entrepreneurs who have sold their businesses and are seeking to preserve and grow their wealth.
“The decline of hedge funds has been apparent for over a decade. In a low-interest-rate environment, the fixed fees associated with hedge funds have become less attractive,” Sonnenfeldt explained in an email to CNBC. He emphasized that hedge funds could no longer deliver the exciting returns that investors are seeking.
Given the changing investment landscape, high-net-worth individuals are finding better opportunities with index funds like the QQQ and SPY, which offer more liquidity, lower fees, and potentially higher returns compared to hedge funds. The Invesco QQQ ETF saw a 55% increase in 2023, while the SPDR S&P 500 ETF gained nearly 25% during the same period.
Global hedge funds rebounded with a 13.3% return last year, following a -6.8% decline in 2022. However, Preqin’s data shows that the industry has experienced net outflows of over $217.3 billion from the last quarter of 2014 to the end of 2023.
Investors are increasingly reevaluating their hedge fund allocations, with many feeling that these investments are falling short of their long-term expectations. This shift away from traditional hedge funds reflects a broader trend among high-net-worth individuals towards more efficient and cost-effective investment strategies.