JD Montgomery, an adviser to about 30 wealthy families at Canterbury Consulting, is among those who have seen some power shift back to family offices. Funds with a history of being highly selective about new investors -- or even closed to them -- are now offering up allocations, sometimes with lower minimums, Montgomery said in an interview.
Wealth managers are seeing funds tailor investment terms for them by, say, adding leverage to a portfolio or agreeing to set a hurdle rate, which is a minimum return before incentive fees kick in. Several family chief investment officers have seen hedge funds offer concessions, like lowering fees for all investors once the firm reaches a certain size.
“We did start telling our prospective fund managers about two years ago that if you were a traditional long-short strategy and you were looking for 2 and 20, we probably shouldn’t have the meeting,” said Michael Silverman, chief investment officer for multifamily office Crow Holdings Capital-Investment Partners, referring to the management and performance fees traditionally charged.
Family offices are gaining traction on that front. Only 7 percent say they pay an average management fee of 2 percent, while 30 percent fork over less than 1.5 percent, according to a JPMorgan survey last month. The report polled 84 offices with more than $66 billion in hedge fund assets.
More Reliable
Hedge funds are also being adaptable because sophisticated family offices can be more reliable long-term investors. Institutions such as pension funds face pressure to meet annual performance goals and make regular payouts, while family offices are often focused on preserving wealth.
Eighty percent of family offices in the JPMorgan survey said they’d made a new investment in hedge funds in 2016 and the same number said they will maintain or increase their allocations as a percentage of their portfolio. Fifty-six percent of managers reported that a greater portion of their cash came from private wealth investors at the end of 2016 than the year before, according data from Preqin.
“Most institutions have term limits on investment committee participation, while many families do not,” said Andre Mehta, a managing director at Cambridge Associates, an investment consulting firm that assists wealthy individuals, pensions and nonprofits in making hedge fund allocations. “As a result, families may have a longer time horizon than some institutions.”
Even though the size of a family investment may be smaller than an institution -- more than 60 percent of families say they allocate less than $10 million per fund, according to JPMorgan -- the sales process is less onerous.
“In the institutional world, the sales cycle from meeting with a potential investor to them writing a check could be -- who knows? In some cases, it’s a year,” Wexford’s Shapiro said. “We find that family offices often move the fastest. They’re very practical. They’re very pragmatic. They’re very flexible.”
This article was provided by Bloomberg News.