Hedge fund turmoil a boon for family offices

Date: Wednesday, May 13, 2009
Author: Joseph A. Giannone, Reuters

Tumbling markets and redemption waves have been murder on hedge funds, but the turmoil will free up top-tier talent for a quiet but well-heeled corner of the market: family offices.

The world's wealthiest, not content to hand their fortunes to brokers and banks, can afford to build their own money management businesses. These offices, which would never be considered by top fund managers during the go-go years, suddenly look attractive thanks to their stable capital and long-term investment horizon.

"You follow the money. Right now that is leading people to family offices," said Greg Coules, a former hedge fund manager who is building a family office recruiting practice at New York-based Hunter Advisors.

Last year's market turmoil sparked record redemptions and a wave of layoffs at hedge funds, reversing more than a decade of phenomenal growth. The great hedge fund shakeout of 2008 has prompted many fund managers and analysts to reconsider where they should be working, Coules said.

An individual may be great at picking long-term winners, but not so good at raising money, marketing or churning out short-term gains.

"The problem is, for years all the investment talent got pushed into one area, to where the money was: hedge funds," said Adam Herz, head of Hunter Advisors hedge fund recruiting. "Now you have issues in the market and people see some of the problems with hedge fund structure."

Industry studies estimate that single-family offices worldwide manage upward of $3 trillion. Multi-family businesses run by banks and other institutions have about $350 billion in assets, according to Boston-based consulting firm Cerulli Associates.

Some well known hedge funds, such as Och Ziff Capital Management Group (OZM.N), started out as family offices.

Last year's market downturn, when hedge funds on average fell by 18 percent and U.S. stocks 40 percent, hammered the dynastic wealth of the ultra-wealthy.

"Some will stay in business, but others will decide to pack it in and outsource," said Coules, who observed it takes about $500 million for family offices to be cost-efficient.

Family offices remain major players. They have grown steadily and on average have done a good job of preserving wealth during the downturn.

Robert Testa, a Cerulli analyst, said hedge fund hotshots cannot simply show up and expect to be hired by families, who understandably take a keen interest in how their money is managed.

"These people are looking for the best of the best. A search can take two years," Testa said.

The pay is good, Hunter's Coules said -- though not the multimillion dollar windfalls seen among hedge funds until recently. Still, managers may place greater value on having the freedom to make long-term bets.

"A family can give their manager a longer rope, allow an investment idea more time to see if it works out," Coules said.