Hedge Funds versus Family Offices – are they really so different?

One of the questions we are frequently asked is “are there really any significant differences between the management of a family office and the management of a hedge fund? Isn’t the content of your family office program the same as the content of your hedge fund course?”.

Well, it’s true that superficially, they may seem similar. Both types of entities are buy-side investment vehicles. Both stand outside the mainstream of financial institutions. Both tend to have a small number of employees but may manage billions of dollars in investments. And the content and structure of the two programs are parallel – they both include modules on structuring and set-up, portfolio management, operations and technology, governance and HR, among other topics.

However, as soon as you start to learn about the subjects in more detail it becomes clear that there are significant differences.

Many of the differences emerge fundamentally because family offices have very different drivers from hedge funds. As Walid Chiniara makes clear in the first module of the family office program, these vehicles are driven not by pure financial motivations but by the heart as well as the head. Family offices are by their nature constructed to take care of family members, and family members bring complex relationships into the picture, including emotions, different needs and different abilities. No-one discusses “love” in the context of a hedge fund – but for a family office, it’s a factor that must be included.

How does the family and its relationships impact the elements of a family office? Here are some examples, which might surprise you if you’re from an institutional financial background:

  • Governance - the Governance module, delivered by Julian Lim, covers multiple impacts, from the need for a Family Charter as the foundational document of the vehicle to the inclusion of family members on governing committees.
  • Portfolio Management – a hedge fund may have an investment strategy with a timeline in terms of nanoseconds. A family office might have an investment strategy with a timeline in terms of centuries.
  • Philanthropy – not a topic that is covered at all in our hedge fund program. It is often a crucial part of a family office’s purpose and structure – in extreme cases the principals of a family office may want to give away all of their wealth. Philanthropy can be impacted by family relationships as different generations have different desires and modes of interacting with charities – Next Gen family members
    • are more focused on seeing the results of their giving
    • want to be more personally involved
    • are very keen to see data on the positive impact of their donations

and they favour new types of vehicles eg

    • Crowdfunding
    • Giving Circles
    • Impact Investing
    • Volunteering.
  • Human Resources – as Tayyab Mohammad and Paul Westall make clear, the family always comes first, potentially even to the exclusion of financial logic. And so working in a small team with possibly whimsical principals may be very problematic for staff who have made their careers in traditional financial institutions.
  • Another way that emotion impacts on a family office in a way that it doesn’t with hedge funds is in the area of Passion Investments. In our Non-Financial Services module, Lucia Perchard and James Haithwaite cover investments in jewellery, fine wine, art and classic cars – collections that may straddle between personal interest and investment-worthiness, and that require different handling from the more traditional investments generally held by hedge funds.
  • And finally, Risk Management takes on a very different aspect in the family arena from in a normal hedge fund – risks such as kidnap, divorce, family resentments, the roles of heirs, and confidentiality breaches must be included. Arabella Murphy takes us through the spectrum of risks and discusses the best way to create a comprehensive Risk Plan to enable a family office to identify, manage and mitigate risk in this environment.

Weaving through all of the modules in the family office program are issues related to tax and trusts. The tax issues again are different from those encountered in a hedge fund, and trust structures are far more important, so there is a module dedicated to Succession and Estate Planning which covers these topics in detail.

 

In the IPI Professional Network, we try to cater to the participants of both of our courses.

Our last webinar expanded on the Passion Investments topic to cover investing in Diamonds. Our speaker, Alex Alexander, started his career in investment banking and then founded and managed Summit Capital, a boutique investment and financial advisory firm focused on natural resources and commodities trading, before becoming actively involved in diamond markets. He acquired three diamond mines and established buying operations Africa. He is also associated with a diamond auction house and a diamond jewellery brand.

Alex covered how diamonds are formed and their journey to being turned into jewellery. He also discussed supply, demand and valuation of diamonds and the essentials of treating them as an investment class.

This month’s webinar will be of more interest to our Hedge Fund Education Program participants.  Tom Pontin of Shikuma Capital will be covering his journey from being a hedge fund employee to being a hedge fund founder. He’ll give us his insights into how a founder’s perspective is different from an employee’s, how the role changes, the importance of building in operational alpha from the beginning, and the sheer volume of topics that a founder has to be on top of. Of course, these are all subjects that the curriculum of the Henley Executive Hedge Fund Program, our hedge fund certification program, was designed to cover.

 

Addendum: A little good news from Eugene in Ukraine – he has been using his entrepreneurial skills to, as he puts it, “find vehicles for sale, fundraise the budget, do technical service, and then drive 1000 km to give paramedics keys for their new Ambulances!”. You can find more information about what he and his fellow Ukrainian entrepreneurs are doing here - https://www.helpukraine.casers.org/ - and you can donate through the website too.

 

For further information, please contact Lisa So at lisa.so@ipi-edu.com.