(Bloomberg News) Daniel Lubin, whose family wealth comes from a maker of diaper-rash cream built by his grandfather and later acquired by Pfizer Inc., is taking more control of his fortune.

Lubin, 52, chairman of Upsher Asset Management, a so-called single-family office that oversees the assets of his family and three others descended from his grandfather, is shifting capital from outside funds into direct investments. Family offices increased their direct allocations to private companies and real estate last year to an average of 11 percent from 6 percent in 2009, according to a study to be released today by the Wharton Global Family Alliance.

"If you have a third or half of your portfolio where you're paying 2 and 20, suddenly you're saying, 'You know what, these guys are eating up half of my return,'" Lubin said of fees charged by many private equity and hedge funds, traditionally 2 percent of assets and 20 percent of profits. "That doesn't make any sense. There's got to be a better way."

Single-family offices are investing directly because of declining fund returns and concerns that some outside managers charge high fees and may have conflicts of interest, according to Wharton. The offices generally are dedicated to the investment oversight and financial planning of one clan. They usually serve families worth at least $100 million, such as those of computer maker Michael Dell and Microsoft Corp. co- founder Bill Gates.

Upsher Asset Management devotes about 7 percent of its assets to direct investments in private companies or real estate, compared with none five years ago, said Lubin, who is also managing partner of the New York-based venture-capital firm Radius Ventures LLC.

'Profound Changes'

"There are profound changes that occurred as a result of the 2008 and 2009 economic recession and financial crisis," said Raphael "Raffi" Amit, chairman of the Wharton Global Family Alliance, a unit of the University of Pennsylvania's Wharton School in Philadelphia that focuses on wealthy families and their businesses.

Families reported a fivefold increase in their allotments to art collections and precious metals, which made up 5 percent on average in 2011, according to the study.

They cut their average outlay for private equity funds to 9 percent from 11 percent two years earlier. The average portion in hedge funds stayed the same at about 12 percent, while investments dedicated to funds of funds dropped to almost zero.

Conflict Potential

"We see almost a move completely out of fund of funds," Amit said. "These trends are a result of poor performance of fund of funds and the deep concern that family offices have about conflicts of interests at large financial-service companies. That's something that the big banks have to take notice of."

Funds of hedge funds lost an average of 3 percent annually in the four years through 2011, according to Bloomberg's indexes for funds. Funds of funds seek to minimize risk a client would have from investing with a single manager. They generally add a layer of fees on top of the cost of the underlying investments. Funds of funds charge an average 7.6 percent performance fee and 1.3 percent management fee, according to data compiled by Bloomberg.

The Wharton report is based on a survey of 106 families from 24 countries conducted last year. About 41 percent of the respondents were based in the Americas. Amit declined to release country-specific data to preserve confidentiality. Sixty-three percent of respondents held more than $500 million in assets.

Privacy, Control

Advantages of single-family offices include privacy, control and customization. There probably are about 400 in the U.S. with more than $500 million in assets that provide investment management, administrative and family services as independent firms with their own staffs, Amit said.

"People were a little less focused on what it cost to invest and what we were paying managers to get their expertise," before 2008, said Lubin. Since then many family offices have become more focused on risk management, liquidity and fees as returns declined.

Along with paying management and incentive fees, clients in private-equity and hedge funds may be required to commit their money for a period of years.

The median private-equity fund that made its first investment in 2003 produced a 12 percent internal rate of return as of the end the first quarter, compared with 8.8 percent for funds that started in 2008, according to data compiled by Seattle-based researcher PitchBook Data Inc.

Real Estate

Lubin's family office brought in a new adviser for its hedge-fund strategy, hired managers to add investments in commodities and precious metals, and is building its own real estate portfolio, he said. The firm has done more direct deals in industries it's familiar with such as health care since the financial crisis rather than using a fund that may charge high fees and have a lock-up period.

The single-family office this year purchased units in New York's condominium market to rent, he said.

"We will continue to methodically add to the portfolio over the next several years," Lubin said.

"Families found that some of their providers really were conflicted" by fees from certain products or trading revenue, said Laird Pendleton, co-founder of the CCC Alliance LLC, a private consortium of single family offices based in Boston. "People are in-sourcing much of that now."

Adding Staff

Single-family offices saw a 25 percent increase in staff hired to select investment managers and a 12 percent expansion in those dedicated to monitoring performance, according to the Wharton study.

Pendleton also is co-founder and principal of Cairnwood Cooperative Corp., an office that manages his family's wealth into its sixth generation. Pendleton, 57, said his great- grandfather in 1883 started Pittsburgh Plate Glass Co., known today as PPG Industries Inc. The family has increased its direct investments in venture capital and private companies since 2008, he said.

"The crisis showed that a lot of hedge funds and other investments in the alternative area are really a handshake deal," Pendleton said. "There is in many cases a very weak mechanism for being able to go in and remove your assets from a fund."

He and Lubin declined to disclosed their family offices' assets under management.

Dell, Gates

Dell, the founder, chairman and chief executive officer of computer maker Dell Inc., formed a money-management firm called MSD Capital LP in 1998 dedicated to investing his family's assets. The firm has more than $12 billion under management and a staff of about 80 people. It is focused solely on investments for the family in asset classes including publicly traded securities, private equity and real estate.

Todd Fogarty, a spokesman for New York-based MSD, declined to comment on the firm's investments.

Cascade Investment LLC is the personal holding company dedicated to Microsoft co-founder Gates's investments. The Kirkland, Washington-based firm oversees about three-quarters of Gates's $64.6 billion fortune, according to data compiled by the Bloomberg Billionaires Index. Bridgitt Arnold, a family spokeswoman, declined to comment.

About 52 percent of single-family offices reviewed their investment policies this year, compared with 40 percent in 2011, according to a separate study released yesterday by the Family Wealth Alliance, a research and consulting firm. About 27 percent made changes such as placing more emphasis on capital preservation, short-term liquidity and diversification, said Robert Casey, senior managing director for research at the Wheaton, Illinois-based firm.

Ideal Structure

The Family Wealth Alliance study is based on responses from 34 offices, Casey said.

The most successful single-family offices are structured with investment-policy statements, succession-plan documents, education for younger generations and staff dedicated to selecting investment managers and monitoring portfolios, the Wharton study found. High performers had a five-year net return of more than 6 percent annually, Amit said.

"A family can have the best investment advice, estate planning, legal and accounting advice at their disposal," Pendleton said. "If they have a weak family governance system they can wipe out $1 billion in short order."