World’s rich advised to boost investment in emerging markets and hedge funds

Managers of money for the world's rich are planning to boost investments in emerging markets, global stocks and hedge funds as these asset classes, once deemed risky, become more acceptable, research shows.

A report on asset allocation among wealth managers by consultancy Scorpio Partnership found 84% of the senior investment professionals surveyed expect to increase bets on markets in the Asia Pacific region in the next 12 months.

Other emerging markets are also popular, with one third saying they plan to boost allocations to both Latin America and the Middle East and North Africa.

The report also found 40% of wealth managers planning to buy further into stocks and 31% are expecting to boost allocations to alternative investments such as hedge funds.

The research was carried out between April and June 2011 included senior investment professionals from 22 international wealth management firms that together manage US$5.7 trillion in high net worth assets. This is equivalent to 33% of all private client assets managed by wealth management firms worldwide. The participants included universal banks, private banks, private client asset managers, multi-family offices and single family offices.

It also found that 41% are reducing exposure to fixed income and cash allocations are also on hold or declining, reflecting concerns about inflation and the impact of sovereign debt problems.
 
‘Complex economic and market factors are forcing wealth managers to reassess how they generate above average returns for their private clients over the longer term with solid downside protection and an inflation hedge,’ said Catherine Tillotson, managing partner of Scorpio Partnership.
 
‘Many recognise that emerging markets and equity markets offer an attractive source of investment return, but with heightened volatility, persistent concerns about the robustness of the recovery and frontier market fears, managers need effective strategies to counterbalance the associated risks,’ she explained.

‘It is therefore not surprising that we are seeing an increasing allocation to alternative investments, particularly hedge funds, as inflationary concerns hit the bond and cash markets,’ she added.

Wealth managers classify hedge funds at the low risk, low return end of the alternative investment spectrum, highlighting their growing importance of defensive hedge fund strategies in client portfolios.
 
By contrast, private equity is classified as high risk, high return within the alternative investments allocation. Most firms currently have a cautious allocation to private equity either at or below benchmark. However, 50% expect to increase their allocation to private equity this year as a source of long-term investment returns.
 
The research concludes that since 2009, when the previous survey was undertaken, wealth managers have reassessed their wealth management strategies across all asset classes in response to changing economic and market factors. The search for investment returns presents a complex challenge that wealth managers are approaching with due caution.

The report HNW Asset Allocator III: revaluating risk and return in private client portfolios, is the third bi annual survey of asset allocation trends in the global wealth management market. The next survey will take place in the final quarter of 2011.