Hedge funds as well as pretty much all investment managers are recognizing the wealth – the liquid assets – controlled by family offices. Additionally, there’s a boom in the number of family offices making this cohort all the more attractive and potentially profitable. There are three complications when it comes to raising capital from family offices:
- Accessing them. Finding substantial family offices tends to be difficult, as they generally prefer to stay under the radar.
- Having a persuasive narrative. Saying that they’re good is usually meaningless. Unless the hedge fund has a solid and strong track record, performance is an issue. What’s very important to family offices is a concise and powerful explanation and rationale of their investment philosophy.
- Intensifying due diligence. Family offices are much more discerning and critical of hedge funds than ever before. And, most hedge funds are not adequately preparing themselves for the increased scrutiny.
“Hedge funds have experienced a remarkable inflow of investment in the past few months, but family offices remain skeptical. The returns aren't stellar and the fees are a stumbling block,” explains Steffianna Claiden, founder and editor-in-chief of Family Office Review. “The family offices want to know exactly who they are dealing with so the diligence is a bit stiffer.”
According to Andrew O’Connell, CEO, Guidepost Solutions LLC, “Family offices have really stepped up the level of due diligence of all their investment managers, including hedge funds. A growing and important part of the due diligence process is evaluating the integrity and credibility of the people running the money.”
In sum, family offices are becoming increasingly careful and even somewhat diffident when it comes to allocating monies to hedge funds. This is especially the case with newer hedge funds. According to Michael Patanella , audit partner and US asset management sector leader, Grant Thornton, “In my experience, smaller hedge fund managers such as those with less than US$50 million are going have more difficulty raising capital from family offices and high-net-worth individuals because of their limited infrastructure.”
