Family offices are mocked as “the most unprofessional of professional financial functions” as they must unusually serve and balance family and personal needs, as well as financial objectives – an almost impossible set of goals to achieve together. Today, the family office is such an overused emblem of prestige and status that it is almost as meaningless as the term “hedge fund”. Both can mean a lot or nothing at all. Almost anyone can call themselves a family office and hedge fund manager.
Multibillion-dollar trading losses inflicted on banks by Archegos Capital – former hedge fund trader Bill Hwang’s family office – warned bankers they needed to better understand their clients’ ambitions. Yet, mainland and Hong Kong Chinese family offices are evolving as fast as they are being formed. Private bankers point out that each one of the recent multibillion-dollar mainland tech IPOs create about 12 to 14 billionaire family offices. And all of them require the immediate services of private banks, financial advisors, accountants and lawyers.
Family offices are highly individualised organisations, and each is a different setup in terms of philosophy, strategy, goals and execution. Their sophistication is improving as more banking and asset management professionals move into family offices after an institutional career. Most of these offices have to quickly form an investment strategy and end up depending on private banks for advice and products.
Historically, family offices were only formed by a small group of ultra rich, requiring about USD 500 million to fully staff and operate. Today, information and execution technology has lowered the threshold to about USD 100 million. Families with smaller amounts can band together to share infrastructure and deal flow in a multi-family office setup.
The best family offices do more than act as a concierge service for extended families. And decisions are not just made by one family member or patriarch. They follow one of Ben Graham’s principles: “Investment is best done in a businesslike manner”. So they operate like an institutional investment fund. China’s super wealthy need to diversify more because they own too much of the businesses they founded. And the only way to build away from a high concentration of wealth is to establish and manage a professional investment operation that is independent of the family’s main business.
The biggest complaint from family offices is that traditional private banks in Asia do not provide clients with solutions whose results are aligned with each other. Banks only promote a limited menu of in-house approved products. Often these so-called holistic solutions are biased towards what they can offer. The Global Financial Crisis in 2008 and Hong Kong’s debacle with mini-bonds have forced extensive regulations over how financial institutions develop and sell products.
The challenge that faces private banks and clients is that current financial regulations require all alternative asset products to be vetted and approved by the financial service provider’s compliance and legal departments. And private banks rarely approve the marketing of new alternative asset funds featuring new management teams. And clients must demonstrate enough understanding of financial risks before relationship managers can sell them funds with complicated and obscure strategies.
Much of the competitive arena for wealth management and private banking overlaps from firm to firm. Asset custody, investment advice, broad access to traditional asset classes like listed stocks and mutual funds and to some degree alternative investments are commonly offered. However, key products and themes are missing.
Financial advisors specialising in mainland family or multi-family investment operations confirm that the level of sophistication and demand by Chinese investors to seek higher returns by taking direct investment risks has been emboldened by the parade of high profile, multi-billion dollar tech IPOs. They even lament that some of them seek pre-IPO tech deals as if they are a sustainable investment class. Finding the next “Tik Tok” is an unsustainable strategy for most investors. However, private equity is an important source of diversification and returns.
Designing and executing disciplined bottom-up or top-down portfolio strategies is a laborious, disciplined process between clients and advisors. Yet, the underlying desire to participate in unique, alternative asset deals remains strong and financial institutions that can address it will find a competitive advantage.
Still, some mainland Chinese family office clients show resistance to the trust fund structure although they understand the importance of diversification. Many of their deals and ideas come through their social networks, private banks and friends. They don’t see the big picture of deal flow and the entire investment process.
The ultimate evolution of the family office is like Soros or Grosvenor, who developed their management, compliance far enough to manage outside money. Such an evolution actually improves the family office skill set and culture in management and administration. However, few Asian families are willing to accept the required level of professionalism, disclosure, compliance and fiduciary responsibilities.