Hedge Fund Course - Wiley Finance Series

There is currently much attention directed at those investors who marginally qualify to invest in private hedge funds or would not qualify to invest in a hedge fund sold as a private placement but could invest if the fund was registered (see Chapter 7). This group is sometimes called semiaffluent or nearly affluent. Writers define this group differently. Some categorize individuals with a net worth of between $1 million and $10 million as semiaffluent. Others include investors with between $500,000 and $1 million in this group. J. P. Morgan also includes investors above $1 million in a group called semiaffluent.

Regardless of how this group is defined, it includes investors who historically have not had access to hedge funds. Due to changing attitudes, changes in the risk profile of the hedge funds, and new legal developments (notably the registered fund of fund), this group represents a large, almost untapped market. The appeal of marketing to this group of investors is: (1) it constitutes many investors; (2) despite the more limited resources of individual investors, it constitutes a large potential pool of funds (by one account, semiaffluent investors control between $6 trillion and $8 trillion in assets); and (3) this group has invested little in hedge funds to date.

The semiaffluent investors want to invest in hedge funds for the same reasons that high-net-worth investors invest in hedge funds. Because many hedge funds are less volatile than a broadly diversified portfolio of common stocks, these investors may invest in hedge funds to lower the risk of their portfolios. With similar objectives, these investors may seek to lower the volatility of their investment portfolios by diversifying into hedge funds with low correlation to stock and bond returns. Finally, some semiaffluent investors seek out hedge funds to increase the return on their investment assets. As with any group, there are great differences between individuals who could be considered semiaffluent.

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