Trusts are starting to put more of their money into hedge funds and other alternative investments, as heirs exercise more sway over these assets and state laws allow using outside investment managers.

Investors who use hedge funds, private equity and the like in their own portfolios are looking to carry over the benefits in trusts that have named them as beneficiaries. Dana G. Fitzsimons, a partner at McGuireWoods LLP, said heirs are pushing trustees harder to give outside managers more of a role. Trustees, in turn, are seeking ways to shift liability for investment performance to the managers themselves.

Some of the outside managers oversee hedge funds and what are typically seen as alternative assets, although some are involved in the more standard investments in stocks and bonds, too.

Delaware is viewed as leading the movement to let outside managers direct investment and shoulder the responsibility if something goes wrong, while Virginia and others follow. The arrangements are cropping up in generation-skipping trusts created by wealthy people not worried about earning income in the short term who can take risks on long-term returns for their children. Revocable trusts used to keep assets out of probate court after a person dies are another place they are emerging.

Trends in trust investment tend to track the general fashions of investment, but with a lag of several years. Thomas C. Iskalis, director of fiduciary services for Northern Trust's wealth management group, said that over the past 10 years, the use of alternative assets in trusts has grown dramatically.

Historically, it was the duty of the trustee to manage investments in a trust. Over time, though, trust administration and investment have diverged. State statutes known as prudent investor standards have given the wealthy leeway to name investment managers for trusts.

Federal laws limit what trusts can invest in alternatives, based on whether they hold a certain amount of assets. The requirement is $5 million in some cases, and $25 million in others. Some wealthy families reach accredited status by pooling assets of several trusts through partnerships of limited liability corporations.

The Dodd-Frank Act could add further limits.

The trust document itself and state law also set rules for what a trust can invest in. Those who manage a trust's assets need to ensure its investments match up with its obligations. For example, a trust that generates income shouldn't hold too much private equity, which is very illiquid.

Edward F. Koren Jr., a partner and head of the private wealth services group at Holland & Knight in Tampa, Fla., sometimes acts as a trustee for long-time clients who are business owners. If trusts for these clients have marketable assets, he delegates their investment, because he does not want to be exposed to liability issues. His firm tries to match an outside manager's talents with the objectives of each trust.

Jonathan E. Glidden, director of manager research at Wilmington Trust, counsels trustees who are considering using an outside manager to pay less attention to short-term performance and more to the managers' fiduciary ability and philosophy. Getting a financial adviser to help choose the right manager for an alternative asset in a trust is a good idea, according to estate advisers. Often, a wealthy person has access to this kind of advice through the firm acting as trustee.

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