Six Tips For Transforming A Hedge Fund Into A Family Office

Nov 6 2013 | 11:31am ET

By Bijesh Amin
Managing Director, Indus Valley Partners

There has been a lot of talk in the press lately about the potential attraction for U.S. hedge funds to join the list of over 1,000 family offices that exist today. The primary driver being the opportunity to avoid some (not all) regulatory scrutiny from legislation such as the Dodd-Frank act and related filings such as Form PF. Alongside the constant demands for transparency from investors and the downward pressure on fees, many funds may consider that a more parochial investment structure might now be the order of the day.

Regardless of the travails facing Steve Cohen at SAC Capital or the relative success of the Soros and Ichan family offices, there are some operational recommendations which are worth pointing out to any hedge fund GPs that may be considering a move to a family office model.

1. Downsize your infrastructure appropriately BUT cherry-pick your best technology and operations people from your hedge fund – you will need them.

2. If you plan to open a family office with more than 20 support staff, you need a CIO (but not necessarily the one you have now…he or she needs to be very hands-on).

3. Use the cloud – management fees will no longer subsidize your infrastructure spend so an efficient cost-base will be important in order to preserve investment returns.

4. Keep your multiple prime broker relationships - you can still negotiate fees (financing, rebates etc.).

5. You may not need your administrator any more – look at custodians for services you may need as a family office and for your trustees such as; custody, partnership accounting, reporting and investment analytics.

6. Get a data-warehouse...please get a data-warehouse...it will help with all of the above. Sole-reliance on a custodian and/or prime broker means that those Family Offices pursuing sophisticated investment strategies will not have the flexibility to ‘slice and dice’ data for their own means, additionally the scope for cost-savings will be reduced as they will not be able to control the costs of their own operational overheads e.g. if a new trading counterparty is introduced, the regulatory landscape changes or financing fees need to be negotiated.

Thinking of transitioning from a “passive” family office to an “active” model?

Many family offices have traditionally been "passive" investors via Separately Managed Accounts or LP stakes in hedge funds. However there has been widespread dissatisfaction amongst several of the larger family offices of the ultra-wealthy about how they and their families have been advised and their money managed.

In light of this many larger family offices are pursuing "active" management i.e. hiring portfolio managers and investment bankers themselves and building in-house hedge funds or credit intermediation businesses.

It may be as investment banks retreat from activities that eat up regulatory capital and hedge funds manage GP-only money to avoid regulatory scrutiny, family offices become a greater force in the investment management landscape.

Own Your Own Data

The gist of these recommendations is that even under a family office model, owning your own data is as important as when you were a hedge fund. It may be even more so since there is no real reason for a third party administrator, given you will have a better idea of your own NAVs and the only shareholders you will need to “report” to will be you, your family, and key employees (if they invest with you).

Buying a third party data warehouse that already has built-in connectivity out to your prime brokers, custodians and trustees, makes a lot of sense. There is no need to incur the expense and time to build this yourself, and excel will not do. If a secure, cloud version is available look at this option seriously since the cost-savings can be dramatic. In general, when it comes to infrastructure, wherever you can save money helps as management fees will be a thing of the past.

Similarly, unless you want to outsource your accounting to a custodian or an administrator, you will need to buy an off-the-shelf portfolio/shareholder accounting system. Given the simplicity of the family office model – whether single or multiple – compared to the typical hedge fund with its myriad shareholders and series accounting issues, this should be straightforward. Use the system you are familiar with and ideally downsize to a hosted platform if offered by the vendor in question.

Saving time and money on hardware, software, and personnel should be a working principle given how the economic model behind a family office is not conducive to large proprietary infrastructures and support staff. But do not outsource the ownership of your data, no cost-savings are worth the lack of control that would bring.

Bijesh Amin is Managing Director of Indus Valley Partners, a niche technology consultancy focused on the alternative asset management industry.


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