They’ve struggled to raise money more than their bigger brethren, who appeal to investors looking for the safety of size. Big funds also benefit because big institutions like pensions and endowments with lots of assets — who represent the lion’s share of new investments — require larger funds with scale.
Now, it appears there’s some good news for the little guy: family offices are looking to increase their investments in hedge funds, according to a new report from Rothstein Kass, an accounting firm.
As the name suggests, a family office typically manages the money of a wealthy family. The size of investment from these shops tend to be smaller than larger institutional investors, which means they can and do invest in emerging managers.
About 90 percent of the heads of family offices polled in the study say they are highly likely to up their allocations to hedge funds this year. And there’s more money to go around: an average of $416 million to invest, up from $236 million last year, the study says.
The study polled 151 executive directors of family offices that currently allocate to a hedge fund or private equity investor. Previous research by the firm found that among hedge funds with less than $500 million in assets, more than 70 percent viewed family offices as important sources of money. By contrast, 55 percent of hedge funds who manage more than $500 million saw them as important fund-raising sources.
“Interest in sourcing capital from the family office sector is generally increasing, but is especially strong among emerging hedge fund managers,” said Rick Flynn, a principal and head of the family office group at Rothstein Kass. “In the short term, the financial crisis has created a preference among institutional investors toward allocations to larger, established hedge funds.”
Some consider the barriers to entry for small funds — a list that includes stricter regulation from Washington — problematic for the industry as a whole. Jamie Dinan, the founder of the multibillion-dollar York Capital Management, has said he worries that without small, scrappy funds, larger funds like his will get lazy.
To assist the newcomers in their struggles — and to profit along the way — so-called seed funds have begun raising money. These funds typically invest with new hedge fund managers to help get them started, in exchange for an ownership stake or a chunk of the fee revenue.
Family offices could be another way for small managers to get the kind of critical mass that will enable larger investors to begin allocating to them. In their report, Rothstein Kass notes that the family office business model is seen increasingly as a solid way for families to organize their finances.
The favored strategies among the family office directors polled:
1) long/short equity (53 percent)
2) distressed (49 percent)
3) arbitrage (33 percent)
4) managed futures (25 percent)
5) global macro (25 percent)