The Evolution of the Family Office
BHA recently attended an industry conference devoted to family offices and their role in hedge fund investing in 2010. More than 200 single- and multifamily offices were in attendance as well as 250 alternative fund managers. Speaking to numerous family office investment teams and sitting in on a handful of panel discussions, analysts gained considerable insight into how family offices have evolved and how their focus has changed.
To start, the number of family offices in the U.S. and abroad has grown considerably over the past few years. The main reason for this a need for services. Large institutions are not offering affluent investors highly personalized financial services.
Services vary from office to office, however, most are providing investment and finance-related services, such as tax management and advisory services, political donation management, cash flow management and budgeting, and multigenerational wealth transfers. These services are not available in a private banking or traditional wealth-management setting, simply because they are affordable for only the most affluent individuals. During these uncertain and volatile economic times, the demand for highly sophisticated and personalized finance and investment services has increased significantly, and paved the way for teams to spin out and open shop.
Family offices have also increased their activity within the hedge fund space considerably over the past few years. After a disastrous 2008 and an extremely volatile 2009, the need for exposure uncorrelated to the market has become more and more apparent to single family and multifamily offices. Of the roughly 7,000 mandates published on the BHA platform, nearly 1,000 are family offices around the globe actively seeking new investment opportunities.
The three major themes discussed throughout the conference were better liquidity terms, typically at least quarterly; more transparency, including insight into how managers run their strategies and direct access to portfolio managers; and investing through managed accounts.
Although family offices are increasing their activity in the alternative space, they are becoming much more cautious in their approach to new investment opportunities. Furthermore, family offices are increasingly adopting institutional investment practices when conducting due diligence. Track records and performance are no longer enough to justify an allocation; it takes much more to earn the trust of these coveted investors. They are putting more emphasis on operational due diligence, including risk management analysis, administrator reviews, and even manager background checks. Funds with a stable infrastructure and a cohesive team are now the most eligible bachelors.
It is apparent that money is gradually flowing back into the alternative industry, specifically in the family office circle. However, with that also comes a change in perspective and process. Managers will find that they must be much more accommodating if they want to get on the radar screens of an ever-growing segment of the investor market.