A new book reveals the secrets of dealing with the uberwealthy of the hedge fund community.
Hedge fund professionals are the modern royalty of finance.
A new book, Fortune's Fortress, surveyed 294 managers of different
hedge funds with a median net worth of $61.7 million. Subtitled A
Primer on Wealth Preservation for the Hedge Fund Professional, it's an
insider's snapshot without pretense into this turbocharged universe at
the personal level. At $525 a pop, this slim volume is pricey, but
worth the money for anyone aspiring to work with these new Masters of
the Universe.
The book is a how-to guide, incorporating lots of
strategies for aspiring wealth managers intent on penetrating this
booming $1.4 trillion market. If you have more than a stitch of
curiosity about this new elite class, climb aboard. There's a lot in
its 119 pages, which are well illustrated with graphs.
The quartet of authors are Russ Alan Prince,
president of Prince & Associates; Arthur A. Bavelas, CEO of
Resource Network Ltd; Edward A. Renn, principal of the law firm of
Withers Bergman LLP; and Mindy F. Rosenthal, of MARHedge, the
publisher. All are specialists and authorities on private wealth and
the hedge fund industry.
The book is aimed at a specialized audience: hedge
fund professionals and traders and advisors to the hedge fund
community. Bavelas says, "Early on we advised a couple of hedge fund
principals and discovered that even with their vast wealth, resources
and financial prowess, they were largely underserved. They hadn't
addressed key fundamental issues in protecting the vast wealth they had
worked so diligently to amass." He notes that the book, despite its
steep price, has generated steady sales so far not only among
advisors to the industry pros themselves, but also to private equity
principals and family office executives.
Here are some highlights from the authors' findings:
The very wealthy-those with $10 million or more in
assets-are multiplying faster, and the size of their fortunes is
growing. Based on their study, the authors estimate there are 1.1
million families worldwide with a net worth of $10 million or more,
controlling in excess of $91.7 trillion. Most, they reckon, are
candidates to invest in hedge funds or funds of funds.
Like most affluent individuals, hedge fund pros are
in need of wealth preservation, estate planning and asset protection
services as much as or even more than less affluent individuals.
Astonishingly, not unlike average Americans, three out of five hedge
fund pros surveyed don't have an estate plan with anything more than a
simple will-leaving 151 with no plan at all.
The reason: As the book points out, many are so
zeroed in on creating wealth that they have sorely neglected their own
needs to efficiently transfer and protect that wealth. Neither do many
have a succession plan in place or a plan for replacing a partner who
dies or is disabled, which could lead to the dissolution of the fund.
Strategies addressing such contingencies, the authors point out,
include setting up a qualified domestic trust, establishing buy/sell
agreements, taking out disability insurance or establishing a captive
insurance company.
For sure, this life isn't for everyone, the authors
stress. To begin with, you must be able to stay centered. The road to
this kind of ultra-wealth demands a huge commitment of time and energy.
There is a high rate of burnout from what the authors call the three
"D's"-drink, drugs and divorce.
Not surprisingly, since the Republican party is seen
as the party of big business, 60.5% of those surveyed are Republicans,
while 28.6% are registered Democrats. The remaining 10.9% are either
independents or something else.
Typically, these men and women are not your
"millionaire next door." As might be expected, despite their 24/7
dedication to their funds and families, they enjoy the good life and
the things money can buy. More than half of those surveyed in the study
define themselves as collectors. As their riches grow, so too do their
collections of modern art, antique automobiles, wine and jewelry.
Typical is the remark of one young hedge fund maverick: "Collecting
vintage cars started as a hobby; as I got rich, it became an obsession."
They are also charitably inclined. They donated, on
average, $1.97 million to charity in 2005. The authors detail various
tax incentives that exist to encourage such largesse-for example,
either a charitable trust or a charitable remainder trust; long-time
givers can establish a foundation.
The authors point out plenty of opportunities for
wealth managers to plant stakes in this elite universe. They recommend
that potential guardians of these individuals' wealth follow the
procedures outlined in what they call the "Virtuous Circle," a process
consisting of six phases, beginning with profiling and fact-finding and
ending with follow-through.
One chapter is devoted to asset-protection
approaches to serve hedge fund pros. They include such techniques as
specialized trusts, an exotic strategy known as equity stripping,
prenuptial agreements and related strategies. Wealth of this nature
attracts attention, of course, not all of it welcome. As much as
anything, this group needs protection from creditors, angry ex-spouses
and lawsuits, the authors point out. As one hedge fund pro interviewed
said, "Being in this business is like walking around with a bull's-eye
or kick-me sign on your back."
That plenty of knavery exists in this world perhaps
comes as no surprise. Unprincipled advisors and clients at times will
seek to circumvent the law, and the authors detail several such
instances, such as the misuse of trusts. The book points out the
pitfalls of going over the edge, for client and financial advisor
alike.
To serve this clientele the bar is high: Anyone
seeking to do so, according to the authors, must have proven integrity,
extensive technical expertise, access to niche experts and experience
in working with such clients, among other attributes. Those wealth
preservation specialists who measure up are usually found through
referrals and through peers and family and friends.
Clearly, the wealthy men and women in the hedge fund
industry are sorely in need of wealth management which, when executed
properly, integrates estate planning and asset protection. Fortune's
Fortress can be a valuable tool for advisors.
You may read the first chapter of "Fortune's Fortress" and purchase the book online at www.resourcenetworkltd.com.
Bruce W. Fraser, ([email protected]) a financial writer in New York City, contributes to many publications.