Investors with at least $25 million in net worth are boosting their exposure to alternative investments. At the same time, these UHNW households are keeping some money in familiar territory: tax-free municipal bonds. The Spectrem Group, a Chicago-based consulting firm, reached those conclusions in recent online and mail surveys.
Among those surveyed, 25% of total investable assets are in alternatives, compared to 20% percent in 2010 and 16% in 2007-that's an allocation increase of more than 50% in five years. "Wealthy investors are using all types of alternatives," said Spectrem Group president George Walper, Jr. "That includes hedge funds, venture capital, private equity, futures, and precious metals." Concurrently, UHNW investors' exposure to stocks and bonds, including restricted stock and options, has fallen from 21% of their total investments in 2007 to 20% in 2010 and 18% now.
Walper attributed the increased exposure to alternatives to dissatisfaction with recent investment returns from traditional assets. Survey respondents are seeking exceptional investment returns and many believe they'll succeed. More than one-quarter of those surveyed said that they expect to make an annual return of at least 16%, including 11% who expect returns greater than 25%.
Seeking such returns, many of these affluent investors turn to hedge funds, which are owned by 47% of $25 million-plus households, Spectrem Group found. "Among the hedge fund owners, 32% own one hedge fund," Walper said. "The others own multiple hedge funds, with 5% saying that they own seven or more hedge funds."
The lesson for advisors, Walper concluded, is that advisors seeking to work with affluent investors need to offer a much broader array of choices than just the traditional asset classes. "Most survey respondents said they had more than one advisor, but they usually have one primary advisor they'll turn to first," he said. "The broader the services that advisors can offer and the better they communicate with such clients, the greater advisors' chances are of being Number One."
Tax planning might be among the services that advisors emphasize to wealthy clients. Facing possible hikes in tax rates, 60% of respondents are investing in tax-free bonds, Spectrem Group reported. In other tax-related activity, 59% percent are revising their estate plans, 55% percent are meeting with their tax planners, 47% percent are increasing their charitable contributions, 28% percent are buying tax-advantaged life insurance, and 24% are considering a change of legal residence to a state with no state income tax.
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