An exotic feast for investors

Call them the gourmet delis of investing. BDirect Capital, a Boston startup, is one of the latest to package private-equity investments into portfolios that will be sold through brokers and financial advisers for as low as $25,000. The idea is to "bring alternative investments to the great unwashed," says Paul Sanabria, the company's co-founder. Referring to multimillionaires as unwashed might be pushing it. But the number of newly minted millionaire households is skyrocketing, and Mr. Sanabria's goal is to get alternative investments into the portfolios of those who qualify for them. Along those same lines, HedgeWorld.com recently announced plans to launch a hedge fund supermarket that will provide qualified investors and their advisers with the ability to shop online for investments. Not everyone, however, interprets the increased emphasis on alternative investment the same way. "Right now, the appetites for alternative investments are enormous," says Burton Greenwald, a financial services industry consultant in Philadelphia. "But this is a phenomenon that is coming at what is likely the tail end of the longest bull market in history, and gains of 20% or 30% a year are no longer enough." Mr. Greenwald understands the marketing logic between more-customized products and lower minimum-investment requirements that are aimed at reaching a relatively untapped wealth market. But he is concerned that the interest in those products is not driven by rational and prudent investing principles. "I tend to wonder if these investors are really aware of the risks and lack of liquidity associated with these products, and I wonder if this increased demand is for more product than is truly viable," he says. "I wonder what kind of product is getting down to the masses?"

Source of demand

Johann Wong, president and founder of HedgeWorld.com, based in Rye, N.Y., says the supermarket was developed in response to "demand from intermediaries." "We're responding to the need and the opportunity," he says. "Intermediaries clearly want to provide more products and services to their clients before those clients go find it someplace else." HedgeWorld's FundSelect is scheduled to launch early next year with more than 40 hedge funds on the shelves. The company says that since the initial announcement earlier this month, more than 50 additional hedge funds have inquired about participating. According to Jeff Joseph, HedgeWorld's managing director, the supermarket will go beyond basically offering product to include the kinds of research, news and analytical tools that will ultimately enable advisers to make educated investment decisions. "The intent is to provide access to the intermediary channel," Mr. Joseph says. "Alternative investments offer characteristics that aren't available in the traditional markets, and advisers are becoming more aware of that. This is really driven by adviser-based interests." It is difficult to build a case against the so-called alternative-class investments, which typically refer to the kinds of investments that are available only to wealthy individuals and institutions.According to Venture Economics in Boston, even last year when the Dow Jones Industrial Average gained 25%, venture capital funds gained 146%, and private-equity funds gained 61%.

Growth is rapid

And in bear markets, some alternative investments seem like the obvious choice. This year through October, the Dow lost nearly 5%, while the CSFB/Tremont Hedge Fund Index rose nearly 4%. As both HedgeWorld and BDirect will attest, the market on both sides of the alternative-investment spectrum is growing dramatically. According to the Federal Reserve, the number of households in this country with investible assets in excess of $1 million more than tripled to 2.7 million households between 1992 and 1999. On the product side, since 1987 the number of hedge funds has increased by 3,900%, according to Hennessee Group LLC in New York. Over that same period, the number of mutual funds grew by 304%. "There's no doubt in my mind that there is a demand for this from investors," Mr. Sanabria says. And, in terms of the private-equity funds, "they're scared of running out of money," Mr Sanabria says. For a company like BDirect, the financial adviser represents a key path to the so-called newly affluent, those people whose net worth is between $1 million and $20 million. "Companies have always focused on the superwealthy, not the moderately wealthy," Mr. Sanabria says. "This is about making private-equity an investment class."