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.