IRA Market Growth Promising for Alternatives

Chidem Kurdas

Individual retirement accounts may not be what comes to mind when you think of hedge fund investing. But people can invest in hedge funds – or other alternatives – through IRAs, which held more than $4 trillion as of late 2009. That’s around one-fourth of total US retirement assets.

IRAs could grow to as much as $7.5 trillion over the next 10 to 15 years. When people leave their jobs, they often move employer-sponsored accounts into self-directed IRAs.  “By some estimations, the IRA marketplace is expected to crest at $7 to $7.5 trillion dollars, thanks to Baby Boomers rolling funds out of their employer-sponsored qualified plans such as 401(k)s,” says Rob Spalding of  Pensco Trust Co.

Compared to other retirement programs, IRAs are the most flexible for alternative investing, Mr. Spalding said, speaking at a seminar organized by accounting firm McGladrey. There are a variety of Internal Revenue Service rules on what’s allowed, but investments made in IRA plans have a wide range including real estate, company debt and venture capital.

Hedge funds get a small part of the IRA alternative investment dollar. In the past, many clients invested in real estate such as rental properties because this was something they were familiar with, Mr. Spalding says.

Pensco is a specialist custodian-administrator of alternative investments in retirement accounts. The custodian does not analyze the suitability of an investment from a fiduciary point of view but does review it from the tax angle. The decision to invest is made by the IRA owner and his or her financial advisor, but the plan custodian can reject an investment that violates IRS rules.

From a fund manager’s perspective, retirement investments have the advantage of being sticky, unlike allocations by fast-redeeming funds of funds, say. But for many managers this different kind of market is not easy to tap.

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