Hedge funds aren’t doing well in terms of performance – that will just increase the number of family offices.
A recent report by Citi, a US bank, on the global hedge fund industry found that assets in the sector fell in August this year by $78.4 billion, the biggest fall since October 2008 when the financial crisis was at its most potent. Hedge funds, set up originally to “hedge” against falling markets, don’t seem to like volatile markets like the ones of the last few months. But maybe there is something more fundamental happening.
Because bad performance, coupled with regulatory pressures, will likely see more hedge funds turn themselves into family offices, as they seek refuge in family-only investments, where regulatory and client pressures are pretty much absent.
The latest hedge fund manager to convert his fund into a family office is John Brynjolfsson, the chief investment officer of Armored Wolf, a California based hedge fund. Brynjolfsson said he is closing his hedge fund to outside investors and converting it into a family office to manage his own money.
In an interview with Bloomberg, Brynjolfsson added that he was looking forward to a sabbatical and that the five-year bear market in commodities had made the decision easier. Numerous hedge funds managers have already converted their funds into family offices; notable investors who’ve made the move include George Soros, Carl Icahn, John Thaler and Stanley Druckenmiller.
As Family Capital reported recently, a number of other hedge fund managers might not have quit their day jobs running hedge funds but have set up family offices. This has led to some questions about a possible conflict of interest in terms of the advice they’re giving their hedge funds clients and what they’re investing in at their family office. The US Securities and Exchange Commission seems to be aware of the problems and may crackdown soon, say people close to the regulator.
Given performance pressures and potential regulatory difficulties more hedge fund managers may also be thinking about following the herd and moving all their investments into their family office – and saying goodbye to the wonderful world of hedge funds.