Hedge Funds Fall Out Of Favor With The U.S. Rich

Hedge funds lost favor in 2006 for the wealthiest American families, a new survey showed.

Just 27% of households with a net worth of $25 million or more, excluding their primary residence, invested in hedge funds in 2006, down from 38% in 2005, the survey by Chicago-based consulting firm Spectrem Group showed.

The survey of 526 qualified households in the United States also showed those in the lower end of that bracket, with $5 million or more, cut their hedge fund exposure to 14% in 2006 from 17% in 2005.

The findings by the Spectrem survey was bolstered by another survey of institutional investors that showed a general cooling of hedge fund investment in the 2006 fourth quarter.

While the industry as a whole attracted a record $126.5 billion in new money in 2006, growing the industry to a record $1.43 trillion, the pace of new money slowed in the fourth quarter to $15.8 billion, according to Hedge Fund Research.

Hedge funds, which have grown meteorically in both numbers and assets in recent years, are faced with declining aggregate performance as strategies become overcrowded, pushing returns down. And well publicized flame-outs, such as happened to Amaranth Advisors, MotherRock and others last year, quelled investor enthusiasm for the lightly regulated asset class.

Overall, hedge funds failed to outperform the Standard & Poor's 500 index for 2006, HFR said. The HFRI Fund Weighted Composite Index returned 12.85 percent for 2006, compared with
15.8% total return for the S&P 500 Index.

"Hedge fund investing appears to have lost some of its luster for the very richest Americans," Catherine McBreen, Spectrem Group managing director, said in a statement. "A nearly one-third decline in the percentage of those households investing in hedge funds suggests the difficulties of 2006 have made their mark."