For a number of reasons, some hedge funds are returning outside capital and adopting the legal structure of a family office to run their own monies. What is telling is that many of these private investment companies are having some difficulties when they seek to expand the services they provide beyond money management.
Regulatory considerations, investor pressures, and operational costs are often contributing factors in motivating some hedge funds to shed outside investors and adopt a family office structure. While this is happening more frequently, it is not pervasive throughout the hedge fund industry.
What is sizing up to be a serious complication for these hedge fund to family office conversions is when they choose to expand the services they provide beyond investment management. Although these firms are defined as family offices, they are first and foremost private investment companies. As former hedge funds, managing money is what they were built for, intimately understand, and where their strongest interests lie. When they seek to become multi-service family offices, they many times fail to provide high-caliber results.
“Many of the hedge funds that have made the shift so far are really family offices in name only. Mainly motivated by the regulatory benefit, most managers don’t initially focus on building an integrated family office services platform. As they begin to look beyond investment management components to deliver advanced planning and lifestyle services, managers often just bolt-on providers. When weighing options, many managers do not display the same level of due diligence they apply in making investment decisions,” explains Rick Flynn, managing partner at Flynn Family Office (FFO). “Without coordination of deliverables, the bolt-on approach is inadequate even when elite third-parties are engaged.”
Evidence suggests that the bolt-on approach currently falls short of standards for both quality and pricing. Not only are new single-family offices failing to consistently secure highest-quality products and services, they are often overpaying for inferior effort.
“The highest functioning and most successful family offices understand the business models and operations of their providers. These insights enable them tonegotiate preferential service arrangements,” said Flynn. It is very likely that these transformed hedge funds will, in relatively short order, become quite adept at both generating synergies that characterize high functioning family offices and ensuring they are getting maximum value for minimum cost. Considerable anecdotal evidence indicates that they are very fast learners.