Family Offices Boosting Alternative Investment Sector

by Phillip Morton, Investors Offshore.com

17 October 2008

The alternative investment sector will continue to benefit from increasing asset allocations from Single Family Offices (SFOs), according to the latest research report sponsored by CPA firm Rothstein Kass.

The white paper, entitled “On the Rise,” co-sponsored by G Capital, highlights the growing relationship between the alternative investment community and SFOs, entities established to serve the needs of individual high-net-worth families. The report was co-authored by Russ Alan Prince, a leading authority and counselor on private wealth, and Hannah Shaw Grove, a widely recognized expert on behaviors and finances of high-net-worth individuals.

Among notable findings:

• Almost three-quarters of SFOs currently invest in hedge funds, with nearly 60% of this group planning additional allocations in the coming year.
• SFOs with hedge fund allocations hold an average of 3.2 hedge funds or fund-of-funds in the portfolio.
• Nearly 70% of SFOs with hedge fund allocations report that these investments have met or exceeded performance expectations over the past 12 months.
• Over 80% of respondents reported 24 month performance was ‘as expected’ or better.
• More than 70% of SFOs with hedge fund allocations report “lack of transparency” as a key concern. Other concerns sited include lock-up periods (60%), style drift (55%) and fraud (37%).

“Single Family Offices are trusted and highly valued by high-net-worth families they serve because of the individualized attention and customized solutions they provide to holistic wealth management. However, our research suggests that persistent market volatility has placed added importance on the asset allocation function. As SFOs consider an ever-expanding range of investment options, they are increasingly turning to the alternative investment sector and its proven ability to deliver superior returns independent of underlying market conditions,” said Rick Flynn, a Principal in Rothstein Kass’ Family Office Group.

"Moreover, our findings suggest that performance continues to drive alternative investment allocations. Nearly 70% of those polled said that performance over the last 12 months has been ‘as expected’ or ‘better than expected'," he added.

The 'On the Rise' survey was based on telephone interviews with 146 SFOs and was concluded in August 2008. Investable assets ranged from USD312.2 million to USD1.3 billion, with a median of roughly USD500 million. Just under 60% of the firms polled are based in the Americas, with the balance operating in Europe (21%) and Asia (20%).

Additional results were generated from only those entities with reported allocations to the alternative investment sector. For the purposes of this research, SFOs are defined as “created exclusively for or by a single exceptionally wealthy family to provide control, negotiating leverage, and a defense for family members.”

The white paper details the latest evidence of the growing interrelation between SFOs and the alternative investment community. While high-net-worth individuals generally recognize advantages of hedge fund investing, they are frequently confounded by the growing roster of products and services available.

"SFOs have had great success in bridging this knowledge gap,” said Peter Gerhard, Chief Executive Officer of G Capital Management LLC.

“Still, lingering challenges face this blossoming relationship. Both transparency (73%) and style drift (55%) rated as key concerns among respondents. It seems that although high-net-worth families are comfortable involving SFOs in the asset allocation process, they themselves retain a level of involvement. Investors need to feel confident that the funds that have been selected are not only good choices in the moment, but reflect overarching and longer-term investment objectives," he observed.

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