Wealthy individuals refocus on hedge funds

By Pratima Desai

LONDON (Reuters) - Some wealthy individuals are shifting their focus away from stock and fixed income markets to hedge funds because they think prices may have peaked for now, Citigroup Private Bank said.

Over the last three years stock markets have flourished on stronger economic and earnings growth and a commodity boom fueled by Asian demand, while bond yields have dropped to historic lows.

But now with rising interest rates and worries about slower growth, the outlook is not so bright and high net worth individuals are looking at hedge funds, which are supposed to make money whether stock and bond prices rise or fall.

"Where we are now is very much a turning point ... with many of the markets priced to perfection," said Gavin Rankin, head of investment analysis in Europe at Citigroup Private Bank at the Reuters Hedge Funds and Private Equity Summit this week.

"It doesn't really make sense to high net worth individuals to be taking on a significant amount of beta (returns earned from tracking stocks or bonds) exposure."

World stock markets as measured by the MSCI index .MSCIWD are up on average nearly 100 percent to around 336 points from March 2003 levels.

"A significant amount of returns have been generated over the last three years, driven very much by global recovery and liquidity," Rankin said.

"(Wealthy individuals) are looking to significantly trim their exposure (and) looking for managers who can generate returns during market volatility," Rankin.

Rankin said private investors were looking at long/short hedge fund managers, who can buy securities they think are cheap and short sell -- bet on a lower price for a security in the future -- those they see as expensive.

Over the past three years assets under management in the hedge fund industry have grown, but most of that money has come from institutions such as pension funds and not private investors who shifted their assets into stock and bond markets.

Pension funds have been looking for ways to preserve capital during times of market turmoil and diversify away from traditional assets such as stocks and bonds after the equity markets collapsed in 2000.