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Wealthy investors leaving hedge funds seek haven in real estate

Wealthy investors boosted bets on real estate and left hedge funds and equities as concern over high valuations and geopolitical risk push them back to basics.

They had 33% of their portfolios on average in real estate at the end of the second quarter, according to a survey by Tiger 21 released Tuesday. That’s a record since the group of high-net-worth investors started measuring aggregate allocations in 2007.

Manhattan sklyine seen from the roof of Madison Square Park Tower at 45 East 22nd Street in the Flatiron District May 18, 2017
The Manhattan sklyine is seen from the roof of Madison Square Park Tower at 45 East 22nd Street in the Flatiron District of New York, U.S., on Thursday, May 18, 2017. Madison Square Park Tower is one of several slender high-rise residential towers in Manhattan that rely on new engineering advancements to achieve their height, in this case 777 feet. The tower employs a TMD - a tuned mass damper - which is a 1.2 million pound metal weight suspended from wires near the top of the building designed to sway in the direction opposite of the way winds are pushing it. Photographer: Michael Nagle/Bloomberg

The average allocation of members in hedge funds fell to an all-time low of 4%. That compares with about 5% in the fourth quarter of 2008 in the midst of the financial crisis. Hedge funds have been under pressure from investors troubled by their high fees and poor performance.

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Michael Sonnenfeldt, founder of Tiger 21, said in an interview that the increase in real estate exposure is an “extraordinary move” that’s taken place as investors have shifted out of hedge funds and stocks. Poor returns from fixed income and concern about geopolitical risk also contributed to the move, he said.

"Our members are most comfortable with assets they can have direct ownership of. They can own a building or a part of a small company," Sonnenfeldt said, adding that many Tiger 21 members made their money in real estate and private equity. "When you have such a low ability to produce returns you go to income-producing assets."

The Tiger 21 survey differs from a more optimistic report on hedge funds last week from Credit Suisse that showed allocators intended to increase investments in hedge funds over the next six months.

Tiger 21’s network includes members with assets of about $10 million to $1 billion, and represents a combined $51 billion. The survey represents responses from about a quarter of the group’s 520 members, Sonnenfeldt said.