Hedge funds are looking to the lower-end market for the next batch of money bags, focusing on 'mini millionaires'.

As traditional hedge fund clients like large institutions and super wealthy individuals become increasingly quiet, doctors, lawyers, business owners, or anyone with seven to eight-figure assets are becoming the new targets for hedge funds, and this trend has been accelerating.

The velvet ropes across Wall Street are coming down. From Private Equity to Real Estate operators to popular new Private Credit funds, everyone is trying every means to attract those 'wealthy but not quite billionaire' individuals. According to Andrew Beer of investment firm DBi, some on Wall Street refer to these types of investors as 'fool's money'.

Why is that? The 'smart money' has not been performing well lately. Many hedge funds have found it difficult to even outperform the S&P 500 Index, and some well-known funds in the industry have reported astonishing losses. Major investors related to Private Equity bets have pulled money from hedge funds to increase liquidity, which has weakened institutional interest.

Neil Sheth, global research head at NEPC, said, 'Over the past three years, our clients have talked much less about hedge fund assets than before.' NEPC's clients include Retirement funds and other institutional investors.

To attract new investors, the usually aloof hedge fund managers are increasingly leveraging the private wealth network of brand banks, something they may have previously deemed not worth doing, especially since they have to pay banks to access these clients.

Skeptics warn buyers to be cautious, as investing in hedge funds is not always a good deal. They often tie up client funds and charge individual clients higher fees than well-capitalized institutions. The tax rates are also high. Leverage and liquidity pose risks.

Andrew Graham, founder of Jackson Square Capital, refuses to recommend hedge funds to his clients, stating, "By the time these funds start reaching individual investors, it is no longer the best investment opportunity."

Supporters argue that the retailization of hedge funds allows individual investors to invest in some of the world's most well-known companies, thereby democratizing the industry. They can help to diversify the risks of traditional Stocks and Bonds, preventing the market from falling into a slump.

For 25 years, Viking has operated largely like an elite club. This firm, based in Stamford, Connecticut, attracted Retirement Funds, Endowment Funds, and other foundations by promising high returns the old-fashioned way. Unlike smaller competitors, the firm has never offered commission discounts. The 63-year-old Halvorsen rarely promotes Viking to anyone at meetings.

However, Halvorsen is now pitching products to individuals with millions of dollars in Assets. This steadfast Private Equity firm has been providing investor education to private wealth clients of Banks through webinars, and for the first time, has begun to cultivate clients from JPMorgan and Goldman Sachs.

Efforts are finally paying off. Last year, the firm opened its flagship Fund to new capital for the first time in a decade, attracting enthusiastic participation from retail investors. About one-fifth of the nearly 5 billion dollars raised by Viking came from "mini millionaires."

Others have also sensed the opportunity. Elliott Investment Management has always been known for being selective with clients and previously rejected Bank platforms, but since 2020, the firm has been courting private wealth clients. Elliott Investment is one of the most stable performers in the industry, with an annualized ROI of 12.8% since its founding in 1977, outpacing the S&P 500 Index by about 1 percentage point.

Coatue Management has raised tens of billions of dollars from wealthy clients in recent years and is seeking more clients. The firm launched a Fund that allows individuals to invest a minimum of 0.05 million dollars into Technology Stocks and Venture Capital. The hottest product of 2024, Jain Global, has joined the JPMorgan platform, raising over 1 billion dollars earlier this year through four Bank networks, which accounts for about one-fifth of the total.

More than ten informed sources described the efforts made by the industry. As many details have not yet been disclosed, these individuals requested anonymity. Hedge fund representatives declined to comment.

"Highly Sticky"

Wealthy individuals can become significant clients of hedge funds. Industry executives indicated that once funding commitments are made, they are often less likely to withdraw. In contrast, large Institutions are more likely to request redemptions when conditions are tough.

"We have seen hedge funds being very sticky in retail portfolios," said Margot Kirby of Morgan Stanley. "They typically account for less than 5% of an individual's total allocation and are not viewed as a source of liquidity."

However, what benefits hedge funds does not always favor the ever-growing high net worth clientele. Unlike Institutions with tax-exempt status, individuals must pay capital gains taxes to the USA Internal Revenue Service, including for short-term trades, which can reduce their net gains by 30% to 50%.

More importantly, individuals often have to pay additional fees to the private banking platforms. Some hedge funds are taking action to create more tax-efficient arrangements.

However, for mini-millionaires, the "exclusivity" of investment products may be hard to resist.

DBi co-founder Beer stated that using some hedge fund strategies, such as multi-strategy, can provide "magical diversification," while other strategies do not offer this benefit. "Ordinary people may not be able to distinguish between reliable funds and high-risk funds, especially those that are very well-known."