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World's richest families cutting hedge fund investment, family office survey finds

Managers who invest the money of the world's super-rich have been pulling out of hedge funds and increasing their allocation to private equity and private debt, a new survey found.

The UBS and Campden Research survey of 242 family offices globally found that there was a 0.9 percentage-point decrease in allocation to hedge funds and a 2.3 percentage-point increase in allocations to private equity. Family offices are the investment houses that manage money for ultra-wealthy family groups.

"Ultimately families are patient investors," said Dominic Samuelson, CEO of Campden Wealth, citing two main reasons for the shift.

"Most of them have been extremely successful in creating and establishing businesses and organizations, so it is quite natural for them to want to be engaged," he said. Private equity typically becomes deeply involved in managing and growing individual businesses, while hedge funds are more likely to trade in securities.

"Secondly, you have to be very pragmatic about where the hedge fund industry is today. It doesn't mean that hedge funds are over, but families are challenged by the fee structures of hedge funds. They are not entirely convinced that there is alpha there at the moment," he said.

For the January-to-October period, hedge funds were up 2.85 percent, although they were down 0.48 percent in October, according to data from Eurekahedge released on Wednesday, citing their in-house Eurekahedge Hedge Fund Index, which includes around 2,800 funds with multiple regional mandates. That was compared with the average fund's rise of 1.65 percent for 2015, the data showed.

So far in 2016, global family offices have returned 3.1 percent year-to-date, with around 14 percent of portfolios on average invested in private equity and private investments, while Asia Pacific family offices have seen year-to-date returns of 3.9 percent, with around 23 percent of portfolios in those assets, the survey found.

The survey attributed the better performance of Asia Pacific family offices compared with their global peers to a greater focus on private equity.

Family offices in Asia were particularly interested in co-investment ideas, noted Patricia Quek, UBS' managing director and country team head for Singapore ultra-high net worth and global family offices in Southeast Asia.

Olivier Morin | AFP | Getty Images

In a co-investment, a minority investor would tie-up with a larger investor, typically a private-equity fund, to make a direct investment in a company or project, rather than investing through the larger investor.

She said that clients had a strong appetite for global opportunities, with recent investments including an African telecommunications company, U.S. big data, U.S. food technology and a South Korean e-commerce play.

She also noted that clients were interested in property investments away from their home market, with a particular focus on "trophy properties," such as those located on the Champs-Elysees.

Quek noted that UBS offered family offices various property investment options, ranging from a global property fund with a minimum $250,000 investment to club deals from $25 million to $250 million investments for developments.

The survey found that the shift toward investing in private equity was also partly due to one of family offices' other key concerns: succession planning.

"In the older days, we've got one patriarch. He runs one business," Quek said. "But when families grow to the second and the third generation, we need to create more opportunities ... We need to have more direct investments, so that there are more roles for the naturally more grandchildren."

Planning how to hand over the reins to the next generation had also become more urgent for family offices, the survey found. In the next 10 years, 43 percent of global family offices and 59 percent of those in Asia Pacific expected to undergo a generational transition, the survey found, with those figures rising to 69 percent and 75 percent respectively when looking out to the next 15 years.

About $2 trillion worth of assets will be handed over to the next generation within the next 20 years, the survey found.

That handover process was also one driver of another trend in family offices' investments: a rise in impact investing, or investments intended to both earn a profit and have a positive social or environmental impact.

Based on the survey data, 61 percent of family offices globally and 67 percent in Asia Pacific were either actively engaged or planned to be engaged in impact investing, Samuelson said.

"We do believe strongly that this is being driven by millennials, in essence those families with children that have been born since 1980," he said. "Not only are they keen on seeing and deriving strong financial returns and performance, they're also very concerned about the social impact and the social consequences that that has in the world today."

Quek noted that those investments were often in the healthcare sector, citing a recent fundraising for a type-two diabetes treatment. In March, Reuters reported that UBS partnered with Social Finance Israel to sell a $5.5 million social impact bond related to diabetes prevention among high-risk pre-diabetics.

UBS also has launched an oncology impact fund, its largest impact fund to date, Eric Landolt, head of family advisory for Asia Pacific at UBS, said. In April, the Financial Times reported that UBS raised $471 million for the fund, aimed at early-stage treatments, which the bank said was the largest one in the healthcare sector. Participants agreed to a $500,000 minimum investment and a five-year lock-up period, the report said.

The interest in impact investing wasn't exclusive to Asia, with Samuelson noting the Rockefeller family, which built its fortune on the oil industry, recently saying it would no longer invest in fossil fuels.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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