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Hedge fund managers of the world, throw off your chains. You will be much happier as a family office.
John Paulson — he of the “Greatest Trade Ever”, the bet against the US housing market that earned $15bn from the 2008 crash — is the latest star manager winding up his hedge fund: he declared in July that he would return outside money and continue investing with just his personal fortune. He joins a list of names from industry pioneers George Soros and Stanley Druckenmiller to more recent conversions such as Leon Cooperman and, soon, David Tepper, who have decided that being a family office now holds more appeal.
My FT colleague Robin Wigglesworth once memorably described it as “the professional equivalent of buying sweatpants, moving to Florida and filing for social security”. Worse, it can smack not just of retirement but of defeat. Paulson never repeated his 2008 trick, and the investors who flocked to him then have largely departed. Cooperman also lost clients after US charges that he had made illicit profits from insider trading and despite the fact he settled the claim without admitting wrongdoing.
Most of the masters-of-the-universe set are loath to admit defeat, of course. Steven Cohen retrenched to a family office during a two-year ban on managing outside money following his own scandal — his firm, SAC Capital, pleaded guilty to insider trading in 2013 — but Cohen was back with a new fund as soon as the ban expired.
Managing outside money is lucrative but not necessarily fun. A rash of star managers converted to family offices after the financial crisis, when US and other authorities imposed new regulations and transparency requirements. Despite a limited rollback of red tape, there is no let up in the box-ticking demands of institutional investors and the consultants that advise them.
The erosion of profitability is also continuing. Hedge funds launching today are setting management fees on average at 1.14 per cent, according to research group HFR, down from 1.22 per cent in 2019 and performance fees at 17.16 per cent of profits versus 17.44 per cent last year — both a long way from the 2-and-20 model of old.
Perhaps the biggest complaint: institutional investors can have a hair trigger when it comes to pulling money after a period of underperformance, something that forces managers to be more conservative than their instincts. Even clients who profess themselves focused on the long term may not be able to stay the course. March of this year was another period when redemption requests poured in to hedge funds from investors needing cash fast, forcing funds to liquidate positions at precisely the moment when the market looked to be offering the juiciest investment opportunities. A family office can allow savvy money managers to be bolder, more ambitious, in their trading — a wholly positive reason for making the conversion.
It also frees them up to be bolder and more ambitious in the other ways they plan to use their fortunes. As those of a socially minded or philanthropic bent are increasingly realising, having real impact often means straying into political territory. Outside investors can make that tricky. Hedge fund managers who have given money to charter schools, believing they hold the key to improving public education in the US, have fallen foul of teachers’ unions, which hold sway over the trustees of public pensions funds — some of hedge funds’ largest investors. Unions and their supporters agitated for pension funds to pull money from charter schools’ supporters.
In a toxic climate where even something as apparently innocuous as funding a vaccine can make a philanthropist like Bill Gates the subject of conspiracy theories and personal attacks, it looks sensible to scale back business activities that might be exposed.
Imagine if Soros were trying to run a hedge fund today. Would investors put money with him, and risk becoming targets of evermore virulent critics, including US conservatives and European nationalists, who attack his work to promote democracy and open societies? Soros’s 2011 decision to shut his Quantum fund has been a model for many that have followed. Almost a decade on, conversion to a family office may hold more appeal than ever.
This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment.
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