Family offices have become all the rage today. A “family office” is not a physician’s or dentist’s office, it is a special type of lightly regulated financial firm used by the ultra-rich to manage their uber wealth. Until recently, family offices were mainly used by corporate billionaires such as Bill Gates as the most tax- and cost-effective way to manage their wealth over the long run.
Today, however, a growing number of prominent hedge fund titans are also quietly creating family offices for themselves, in many cases actually as a part of their firms. Billionaire hedge fund managers Bill Ackman, Ray Dalio, Eric Mindich and Dan Och among others have established single family offices, and the trend is raising some hackles in the industry. The critics argue that its obvious that hedge fund managers should remain focused on their hedge funds and live by the results of their efforts.
In regards to a recent “controversy” over Ackman’s profit on Sprout, Ackman states “The Pershing Square funds are not permitted to make private investments. Employees are therefore permitted to invest in private equity, private real estate, venture capital, and funds that invest in these asset classes in addition to other hedge funds. These investments each require consent from our Chief Compliance Officer before they are made. This approach limits but does not eliminate the potential for conflicts of interest from personal investments.”
“I expect hedge fund managers to be 100 percent invested in their hedge funds,” argues Karl Scheer, chief investment officer of the $1.2 billion endowment at the University of Cincinnati. “I prefer that they’re singularly focused in order to achieve the best results.” A statement which seems a bit extreme in our humble opinion.
Are hedge fund family offices just diversification or do they cross the line?
As some analysts point out, the super-rich hedge fund managers are just diversifying their assets. However, both clients and government regulators are concerned that these hedge fund family offices could lead to potential conflicts, including who covers costs for what and in particular the potential for investments to overlap or be on opposite sides.
Critics point out that the lines can and do get blurry. Ackman's Table family office, for example, took a position in Sprout Pharmaceuticals, maker of the first female "Viagra". A soon as the new drug was approved by the FDA in August, Sprout was snapped up by Valeant, a firm that Ackman and Pershing had inside knowledge of related to a recent a hostile-takeover situation.
The business of loosely regulated family offices has mushroomed in today's world of Wall Street plutocrats. It's not just the corporate titans and hedge fund princes who are joining the trend, private equity billionaires including Leon Black and David Bonderman have set up family offices as well.