Investing in Hedge Funds - Private Investors Still Hesitate

The beginning of the year brought a new investment option for profit-seeking investors in Germany: hedge funds. However, private investors still seem to be wary of these alternative investment products, which, in Germany, were banned from sale until 2003. These are the findings of a current study conducted by the Mannheim Centre for European Economic Research (ZEW) among 233 financial analysts.

The experts assume that, so far, the large majority of hedge funds (86 per cent) have been bought by institutional investors and just a small share (14 per cent) by private investors.  This is probably due to the fact that institutional investors are much more acquainted with the particularities of hedge funds than private buyers. The latter will still need some time warming to this new investment tool, since, unlike conventional stocks or bond funds, hedge funds can use all kinds of financial instruments, among them derivatives such as options or futures. The private investors' restraint is also responsible for the low number of hedge funds on sale in Germany at the moment, which often come along with rather moderate historical performances and high fees. According to the experts surveyed by ZEW, the structure of fund buyers will change notably over the coming two years. They expect a quarter of hedge fund buyers to be private investors by that time.

Hedge funds tend to be associated with very speculative investments. However, the main target group of hedge funds set up in Germany have so far been rather conservative buyers. Correspondingly, 87 per cent of the experts recommend to make a long-term investment in hedge funds of at least one year. 16 per cent think that the hedge funds currently traded in Germany might even constitute a long-term investment in retirement provision. Only a small minority considers these new investment tools to be suited for short-term speculations.

Unlike traditional equity funds, hedge funds do not aim at beating a benchmark in the form of a share price index, but focus on generating the highest absolute return possible per year. Faced with years of uncertainty in the stock markets, this concept seems to be very attractive, which is why many have voiced their concerns that hedge funds might siphon off investment capital at the expense of existing mutual funds. The experts consider this to be rather unlikely. Even though only 17 per cent rule out a cannibalisation effect completely, another 77 per cent of the experts expect this effect to be negligible.

Contact

Volker Kleff, E-mail: kleff@zew.de