Wealthy Turn Hedge Funds Into Family OfficesJune 10, 2013
For hundreds of years, family offices have been the financial equivalent of social registers — small, musty preserves of the rich that have little impact on the real world.
But now, because of a giant regulatory loophole, family offices are becoming major players in financial markets. A string of billionaire hedge funders—including George Soros, Carl Icahn and Stanley Druckenmiller—have all transformed their hedge funds into family offices managing billions of dollars. SAC, the giant hedge fund run by Steve Cohen, could become next in line, as the fund grapples with redemptions and government investigations.
Under Dodd-Frank, family offices were given a special exemption from regulation under the Advisers Act, meaning the requirements for disclosure and investor protection are far less onerous than they are for hedge funds.
As Dodd-Frank was being formulated, a group of wealthy families and attorneys formed the Private Investor Coalition, which lobbied Congress to carve out an exemption for family offices. They argued that family offices don’t solicit or invest money from outside investors and therefore shouldn’t be subject to rules aimed at protecting everyday investors.
It remains to be seen how many more billionaire hedge funders will take advantage of the exemption.
“There aren’t that many guys with that much wealth who can just move from a hedge fund to a family office,” said Leor Landa, a partner at Davis Polk who represents hedge funds and other investment companies.
Still, there are now more than 1,000 family offices in the U.S., according to an estimate from the Wharton Family Office Alliance. Their financial might is growing fast. Soros’ family office launched with more than $24 billion. If SAC becomes a family office, investing money from Cohen and key employees, it could still be a multibillion-dollar investment company — and with far fewer regulations.