Family offices’ reverse takeover of Wall Street

Another one bites the dust. JAT, a high-profile hedge fund founded in 2007 by John Thaler which had $1.7 billion under management, is the latest to announce that it will return money to outside investors and transform itself into a family office.

Thaler, who said that he wants to “spend time with my young family and determine which path to pursue next” is following high-profile hedgies George Soros, Carl Icahn and Stanley Druckenmiller, who also converted their funds into family offices. 

Why are they doing it? Because the SEC, which regulates the financial services in America, exempts family offices which do not manage other people’s money from filing information about their dealings, so the regulatory burden is much reduced. Also, hedge fund returns have shrunk in recent years, and some managers have decided to get out. 

This trend makes some people grumpy. They argue that Soros and co are exploiting a loophole simply to escape scrutiny and that these are not “real” family offices. There is something in this argument. A family office normally looks after not just investments, but some of a family’s other affairs, such as tax, investment and regulatory matters, and often provides concierge-like services such as helping with the purchase of property and even scoping out art purchases.

Should regulators crack down? They could easily insist that an entity can only be classed as a family office if it involves non-investment activity, but it would be just as easy for the ex-hedgies to add some. Pointless and expensive regulatory cat-and-mouse would ensue. 

Some of the opposition to hedge fund conversions seems to be that the hedgies simply tick  a box, and are allowed to carry on as before, just with less scrutiny. That is not quite right (they hand back other people’s money first) but the argument contains something of a prejudice against the way these people have made their money. 

In the old days, people amassed their wealth in, say, oil or retail then set up family offices to invest that money. These days many tycoons are in finance to start with, and their family offices are therefore similar to their operating businesses. Some people find that odd. But really what they are doing is fundamentally no different to what Rockefeller did – only the source of funds is different.

Perhaps the trend should be welcomed. Imagine if the Thalers, Druckenmillers and Icahns really do start family finance dynasties. Inevitably some of the characteristics of family businesses – such as long-termism and risk-aversion – would slowly start to seep into their industry. A family business reverse takeover of Wall Street? We can but dream.