Wealthy investors are taking on more risk. Tiger 21 founder explains where they are investing

Key Concepts

• Tiger 21: A private, invite-only networking group for ultra-high net worth individuals.
• Asset Allocation: The distribution of an investment portfolio among different asset categories.
• Private Equity: Investments in companies that are not publicly traded on a stock exchange.
• Public Equity: Investments in stocks of publicly traded companies.
• Real Estate: Property consisting of land and the buildings on it.
• Cryptocurrency: Digital or virtual currency that is secured by cryptography, making it nearly impossible to counterfeit or double-spend.
• Bitcoin: The first and most well-known cryptocurrency.
• Hedge Funds: Investment funds that pool capital from accredited investors or institutional investors and invest in a variety of assets, often with complex portfolio-construction and risk-management techniques.
• Index Funds: A type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index.
• Fixed Income: Investments that provide a fixed rate of return, such as bonds.
• Liquidity Event: An event that allows an owner of a business to convert their ownership stake into cash, such as an acquisition or an IPO.
• Entrepreneurship: The activity of setting up a business or businesses, taking on financial risks in the hope of profit.
• AI (Artificial Intelligence): The simulation of human intelligence processes by machines, especially computer systems.

Tiger 21 Q3 Asset Allocation Report and Trends

This summary details the findings from Tiger 21's third-quarter report, focusing on the asset allocation strategies of its ultra-high net worth members, as discussed by Michael Sonnenfeld, founder and chairman of Tiger 21.

Main Topics and Key Points

• Overall Asset Allocation (Q3 Data):

  • Tiger 21 members, collectively managing $250 billion across 1700 individuals, are exhibiting a "risk-on" portfolio approach.
  • The primary asset classes are:
    • Private Equity: 30%
    • Real Estate: 26%
    • Public Equity: 23%
  • This allocation indicates a long-term, bullish outlook.

• Emergence of Cryptocurrency:

  • Cryptocurrency holdings have doubled over the past year, increasing from approximately 1-2% to 2%.
  • While seemingly small, this represents a significant $5 billion in crypto assets within the $250 billion portfolio.
  • Members are actively discussing whether crypto is a new security asset or a safe-haven asset akin to gold.
  • Bitcoin is the dominant cryptocurrency discussed, though other digital currencies are also explored by specialized traders.

• Long-Term Shifts in Asset Allocation:

  • Private Equity Growth: The most significant systemic change over the past decade has been the increase in private equity allocation from 10% to 30%.
  • Hedge Fund Decline: Hedge fund allocations have significantly decreased from 6-7% to 2%. Sonnenfeld states, "Hedge funds are basically dead as a doornail."
    • Reasoning: Members have found that hedge funds, particularly those investing in public stocks, struggle to outperform market averages and incur higher fees. Index funds are considered a more cost-effective alternative.

• Fixed Income and Crypto:

  • Fixed income holdings remain "quite low."
  • Despite its small percentage (2%), crypto is currently the "most talked about asset" among members.

Investment Strategies and Rationale

• Private Equity Engagement:

  • Tiger 21 members are not investing in mega-funds. Instead, they are focusing on smaller, mid-cap funds and making direct investments.
  • Entrepreneurial Advantage: As accomplished entrepreneurs, members can actively participate in direct investments, such as evaluating and purchasing buildings or engaging with small companies.
  • Information Advantage: Direct involvement allows them to be the first to identify and address problems within companies, unlike public stockholders who are often the last to know.

• Wealth Creation vs. Wealth Preservation:

  • Sonnenfeld emphasizes that the "great wealth in America is created by entrepreneurs, not by investors."
  • Tiger 21 members are primarily entrepreneurs who have experienced a "liquidity event."
  • Once wealth is created, the focus shifts to preservation, leading to a more conservative investment approach with lower rates of return but significantly reduced risk.
  • Achieving the rates of return required to become a Tiger 21 member (over 20% for 20-30 years) is exceptionally difficult to sustain.

• Market Volatility and Long-Term Perspective:

  • Members are discussing market trends like potential AI bubbles and overextended tech valuations.
  • However, their approach is not that of day traders. They meet monthly to discuss significant market events and share insights, but they "don't overreact in the moment."
  • Their investment horizon is 10-20 years, focusing on wealth creation rather than short-term market fluctuations.
  • This long-term predisposition supports their significant investment in private equity and other long-term growth areas.

• AI Investment Opportunities:

  • Members see value in long-term AI infrastructure buildout projects.
  • Investment opportunities extend beyond chip manufacturers (like Nvidia) to include companies like Micron and energy providers that support AI development.

Member Demographics and Evolution

• Age Dispersion and Wealth Building:
  • The average age of Tiger 21 members has decreased from around 59 to 51 over the past decade.
  • This shift is attributed to the ability to build significant wealth more rapidly in a globalized, frictionless economy, particularly with the internet.
  • Previously, members joined after completing their wealth-building phase. Now, younger members (around 40) can achieve substantial wealth in 5-10 years and are looking to repeat the process.
  • Consequently, members are transitioning from viewing themselves as passive investors to actively seeking new entrepreneurial ventures after a liquidity event.

Advice for Aspiring Wealth Builders

• Focus on the Basics: Sonnenfeld advises against getting distracted by momentum or "story stocks."
• Steady and Consistent Growth: He highlights the potential for significant wealth creation through owning franchises in sectors like quick-service restaurants (e.g., Dunkin' Donuts, Wendy's).
• Long-Term Strategy: This approach, while perceived as slow, can lead to substantial wealth accumulation with less risk for a "terrific entrepreneur."

Notable Quotes

• "We have a risk on portfolio across our 1700 members, 250 billion. uh 79% is split between private equity, that's the first at 30%. Uh public equity at 23% and real estate at 26%." - Michael Sonnenfeld
• "Hedge funds are basically dead as a doornail." - Michael Sonnenfeld
• "The great wealth in America is created by entrepreneurs, not by investors." - Michael Sonnenfeld
• "When you've created wealth, you want to preserve it and therefore you become an investor." - Michael Sonnenfeld
• "We're not day traders. We're people who are investing for 10 and 20 years in order to create wealth." - Michael Sonnenfeld
• "It's all about the basics." - Michael Sonnenfeld
• "It's slow and steady. Some people think it's like watching the paint dry, but over the long period of time, you can really create great wealth, which with less risk if you're a terrific entrepreneur." - Michael Sonnenfeld

Logical Connections and Synthesis

The report and discussion highlight a clear evolution in the investment strategies of ultra-high net worth individuals. The shift from a significant allocation to hedge funds towards private equity reflects a growing understanding of cost-effectiveness and the potential for alpha generation through direct involvement. The increasing interest in cryptocurrency, while still a small portion of the portfolio, signifies a willingness to explore new asset classes and their potential as both speculative and safe-haven assets.

The core argument presented is that while wealth creation is driven by entrepreneurship, wealth preservation and growth for those who have already achieved significant financial success are best managed through a long-term, diversified, and actively managed approach, particularly in private markets. The younger demographic of Tiger 21 members further underscores the changing landscape of wealth accumulation, where rapid growth is becoming more attainable, leading to a more dynamic and entrepreneurial mindset even among established investors. The advice to focus on fundamentals and long-term, steady growth provides a practical takeaway for individuals seeking to build wealth.

Conclusion

Tiger 21's Q3 report reveals a "risk-on" posture among its ultra-high net worth members, characterized by a strong preference for private equity, real estate, and public equities. A notable trend is the doubling of cryptocurrency holdings, indicating active exploration of this emerging asset class. The decline of hedge funds and the rise of direct private investments underscore a strategic shift towards more cost-effective and hands-on approaches to wealth management. The demographic shift towards younger members suggests a faster pace of wealth creation and a continued entrepreneurial spirit even after achieving significant financial success. The overarching message emphasizes the importance of long-term investing, focusing on fundamentals, and leveraging entrepreneurial acumen for sustained wealth growth and preservation.