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Morgan Stanley’s wealthiest clients shift to hedge funds for defense

Morgan Stanley agreed to sell a business that administers its alternative investment feeder funds to iCapital, a financial-technology firm run by a former Goldman Sachs banker.
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Wealthy investors who have ridden the likes of Apple and Amazon.com to all-time highs are getting increasingly nervous about the stock market’s fragility.

“There’s definitely desire to stay long the equity markets on some level but have some downside protection,” says Ben Huneke, head of investment solutions in Morgan Stanley's wealth management division.
“There’s definitely desire to stay long the equity markets on some level but have some downside protection,” says Ben Huneke, head of investment solutions in Morgan Stanley's wealth management division.

High-net-worth clients of Morgan Stanley have been reversing course and investing in hedge funds, according to Ben Huneke, head of investment solutions in the wealth management division. Investing is getting more complicated as the market turns volatile, benefiting an industry that fell out of favor in recent years. The affluent also fear they may have to pay a hefty portion of their gains to the government.

“Everyone is looking ahead to the elections and what tax policy could look like in various administrations, not only presidential but congressional,” Huneke said in a phone interview. What’s more, “People have become increasingly uncomfortable with the concentration of the indices.”

The S&P 500, fueled by five tech stocks comprising more than 20% of its market value, rallied for five straight months before hitting a speed bump last week. The technology-heavy Nasdaq 100 fell 11% over three trading sessions before recouping some ground Wednesday.

Democratic presidential candidate Joe Biden has said he’d raise capital-gains taxes, meaning investors would take a bigger hit selling stocks and funds that have escalated. President Trump has said he’d lower those tax bills in a second term.

With markets near record highs and interest rates puny, the wealthy face a challenge finding attractive returns in stocks and bonds. Clients of Morgan Stanley’s unit, one of the largest managers for high-net-worth individuals, have chosen alternatives such as credit, real estate and private equity as well as hedge funds, according to Huneke.

They aren’t alone. Big investors including George Soros’s family office and the Texas pension fund have plowed cash into hedge funds, and some prominent managers are seizing the moment and accepting fresh capital for the first time in years. Hedge funds were institutional investors’ favored asset class for this year’s second half, according to a Credit Suisse survey.

Along with long-short equity strategies, Morgan Stanley’s clients are looking at credit hedge funds. They’re not entirely avoiding betting on the stock market.

“There’s definitely desire to stay long the equity markets on some level but have some downside protection,” Huneke said. “Hedging is something people are thinking about as the market has appreciated so quickly.”

Bloomberg News