Why Family Offices Are All the Rage

Why we’re hearing so much about single family offices (SFOs) these days is not only because George Soros gave back the outside capital from his $24 billion hedge fund so as to avoid SEC registration or because Stevie Cohen’s $15 billion hedge fund is likely to end up as an SFO in the wake of his insider trading difficulties.

The real reason is that family offices around the world now control more investment assets than hedge funds.  The latest figures show that there are over 5,000 SFOs and multi-family offices (MFOs) world-wide managing a total of $2.5 trillion in assets.  About two-thirds of that amount is managed by SFOs, of which there are approximately 2,700.  Most family offices are currently based in the US and Europe, but Asia is quickly catching up.

It costs over $1 million a year to operate an SFO, so a family must have at least $100 million in net worth for it to make financial sense.  In fact, though, the average SFO in the US is estimated to have about $500 million in assets.  Also, for an SFO in the US to avoid SEC registration under the new Dodd-Frank rules, all of its assets must be owned entirely by family members, family-owned entities or key SFO staff.

MFOs, on the other hand, manage the assets of multiple affluent families (with fortunes typically greater than $50 million) and, in the US, are required to register with the SEC as investment advisers.  Today, the world’s largest MFOs are units of big banks such as HSBC of Hong Kong ($137 billion of AuM), Northern Trust of Chicago ($112 billion), Bessemer Trust of New York ($78 billion) and BNY Mellon of New York ($76 billion).  The largest European MFOs are Pictet of Geneva ($57 billion) and UBS of Zurich ($48 billion).

While it’s ex-hedge funds that have recently vaulted SFOs into the news, it’s also private funds that have for years been turning to family offices as a source of capital for their investment ideas.  In fact, family offices were early adopters of both hedge funds and private equity funds when those vehicles were in their heyday, but, since 2008, the ultra-wealthy have grown weary of their unexciting returns and indefensible fees.

Instead, family offices are setting their sights nowadays on direct investment opportunities off the beaten track, sometimes in competition with Wall Street investors and increasingly in ‘club deals’ with one another.  So, when you next hear about an investment strategy involving a dairy farm, boutique hotel or clean energy project in a frontier market, don’t be surprised if a bunch of family offices are already in it.

  • Jeff Krasney

    The title of your article is Why Family Offices are All the Rage. You describe family offices but you don’t explain why wealthy families are creating family offices. This was a waste of my time.

    • Stephen Bornstein

      Thanks for your comment. SFOs appeal to ultra-rich families who can afford to take total control of their personal and financial affairs and preserve their family legacy in total privacy. They also have cachet and don’t have to register with the SEC. As you can see from the numbers, the biggest MFOs are the private wealth units of global banks, and the others are upscale investment advisory shops.

      • Jeff Krasney

        Wealthy people have less control over their money when it is placed in some kind of entity. They must believe that they can attract better advisors by pooling their wealth with relatives. There has to be more going on than seeking cachet.

        How are SFOs and MFOs typically organized? Are they set up as corporations taxable as C corporations or S corporations? Are they set up as limited partnerships?
        If they are set up as C corporations, this is a very tax inefficient way to hold a family fortune. If they are set up as S corporations, this type of planning prevents wealthy people from using family limited partnerships as an estate planning technique. If they are set up as a partnership, they have a problem when it comes to the assignability of their interests. How do they get around these problems?

        The devil is in the details. You need to explain all of this if you are writing an article on it.

        • Stephen Bornstein

          No I don’t.

          • Jeff Krasney

            Okay. I should have said that you need to explain all of this stuff if you want to write an article that is worthy of the reader’s time and effort to read it.
            Your article reads like promotional material that is aimed at an unsophisticated audience. I picked this article up off of a tax lawyer’s link from LinkedIn.com and assumed that you were trying to reach a sophisticated legal audience.