Hedge Funds Court 'Mini-Millionaires' as Traditional Giants Retreat

Hedge funds are increasingly setting their sights on a new class of investors: the "mini-millionaires," as traditional affluent clients such as large institutions and ultra-wealthy individuals have become more reticent. This trend is accelerating as professionals like doctors, lawyers, and business owners with assets in the seven to eight-figure range become the latest focus for hedge funds.

The exclusivity of Wall Street is diminishing, with various financial entities from private equity firms to real estate operators now vying to attract individuals who are affluent but not at the billionaire level. This group of investors is sometimes referred to as "dumb money" by industry insiders, as noted by Andrew Beer from investment firm DBi.

The disappointing performance of many hedge funds relative to the S&P 500, combined with significant losses from some well-known funds, has led large investors to withdraw from hedge funds to ensure liquidity. Consequently, interest from institutions has waned, as highlighted by Neil Sheth from NEPC, whose clients include pension funds and other institutional investors.

In response, hedge fund managers are increasingly leveraging the private wealth networks of branded banks, a move previously deemed unnecessary due to the associated costs. This shift represents an attempt to woo new investors, but skeptics caution that hedge fund investments may not always be lucrative. These funds often charge higher fees and may lock up capital, posing significant risks through leverage and liquidity issues.

Notably, fund managers like Viking Global Investors' Andreas Halvorsen are adjusting strategies to engage with individuals with several million dollars to invest. This firm has historically attracted substantial institutional funds, but it is now offering educational webinars and targeting clients from major banks like JPMorgan Chase and Goldman Sachs.

Viking's efforts have been fruitful, as evidenced by the $10 billion in new funding raised last year, with approximately 20% coming from "mini-millionaires." Similarly, Elliott Investment Management has shifted its focus towards private wealth clients, a marked change from its previous selective engagement strategies. Since 1977, Elliott has maintained an annualized return rate of 12.8%, outperforming the S&P 500 by about 1%, an impressive feat that continues to attract new investments.