Family offices returning to hedge funds, according to Preqin data

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Investors
22 Jan, 2014

Family offices are likely to increase their exposure to hedge funds over the next 12 months, with a particular focus on niche or boutique managers, according to data from Preqin.

In 2013, family offices allocated 19.5% of their portfolios to hedge funds, an increase from 16.6% in 2012, and 14.9% in 2011, according to Preqin. Many family offices and private investors, historically the core client base of hedge funds, retreated from the asset class in the aftermath of the financial crisis, where many suffered from gates, suspension of redemptions or worse exposure to frauds such as Bernard Madoff. 

Family offices, according to a 2013 study by Barclays Prime Services, make up roughly 15% of the $2.6 trillion in hedge fund Assets under Management (AuM), a far cry from their pre-crisis levels.  The institutionalisation of hedge fund investing, at the expense of private wealth, is well-documented with Preqin data indicating public pension fund money now comprises 22% of global hedge fund AuM. Despite this, family offices still play a useful role in the alternatives industry, and are going to be critical to the success of launch funds or emerging managers going forward.

“Family offices got burned during the crisis and retreated from the industry. Nonetheless, family offices have been accumulating more capital, and a lot of this money is now going to hedge funds. Admittedly, they are not writing enormous tickets like the public pension plans but they are putting sizeable sums of money – usually between $500,000 and $2 million – into smaller managers. Family offices are therefore very useful sources of capital for emerging managers,” said Amy Bensted, head of hedge funds at Preqin in London.

Family offices are also notorious performance chasers, which helps explain their attraction to smaller managers that often outperform their larger counterparts. The average family office has hedge fund return expectations of around 10%, the highest of all investors, added Preqin. Sixty per-cent of family offices told the Barclays study that their investment mandate was focused on growth as opposed to capital preservation. “By and large family offices tend to prefer high risk strategies and target higher returns. Nonetheless, a significant minority is still focused on capital preservation,” commented Bensted. 

Given their preferences for higher returns and small ticket sizes, family offices routinely struggle to obtain hedge fund fee concessions, as was evidenced in Goldman Sachs’ prime brokerage survey in 2013, which said family offices alongside foundations and endowments were the least effective negotiators on hedge fund fees. 

“Admittedly family office tickets tend to be small so it is only natural they will struggle to negotiate on fees. However, we are seeing a growing trend, particularly in Asia, whereby family offices club together and invest in the same fund and ask for a group fee concession or a lower fee share class from that manager,” said Bensted.

While North America remains the dominant region for family office wealth, Asia should not be ignored, added Bensted.  “Asia is a region where private wealth is growing very fast. Many of the family offices in Asia are still biased in favour of property investing, but as they familiarise themselves with alternatives, that will change. Hedge funds are obviously new to Asian investors, and I believe Asian family offices will be where North American and European family offices are today in 10 years- time,” she said.

 

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Preqinfamily officesGoldman SachsBarclays

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