Family offices have long been the trend leaders for the investing public. Their fascination with hedge funds along with advances in technology made the funds accessible to investors with much smaller assets.
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Hedge funds now, however, are losing favor with family offices. Hedge fund investments comprised 32% of portfolios in 2010, 26% in 2011, and 21% in 2012 so far. Favorability ratings for hedge funds dropped precipitously from 64% in 2011 to 22% in 2012.
The portfolio allocation of funds of hedge funds has dropped from around 9% in 2010 to 2.9% in 2012. In a survey of single and multi-family offices and foundations showed that 26% of respondents had been investing in hedge funds for over two decades.
Family offices select hedge fund managers based on integrity, performance, and edge in the investment process. The survey noted that 56% of families invested in long-short strategies, 37% to distressed strategies, and 33% to event driven and fixed-income arbitrage strategies.
More than one third of respondents said they use mutual funds as defined by the Investment Company Act of 1940 and another 7% were considering using such funds.
Family offices are becoming more concerned about high fees at hedge funds and whether the interests of hedge fund managers are aligned with the best interests of the families the offices represent.
Family offices still have reservations about mutual funds because they feel fund managers are not as high quality as hedge fund managers.
The elements unpacked by this survey in the decisions family offices make about their investments illustrate the different focus family offices have in managing assets for wealthy families. Many are beginning to outsource their CIO functions
to independent RIAs because of Dodd-Frank registration requirements.
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