For an investor, choosing the right investment strategy is key to wealth generation. For an entrepreneur, knowing where to hunt for money could be the difference between success and failure. And indeed, with so many, increasingly greater number of options, it can be difficult to navigate.
A credentialed investment professional can work with you to develop your investment strategy based upon your needs for money, investment horizon, and risk appetite. Accredited investors have a myriad of options available to them. Accredited investor is an individual whose net worth exceeds $1,000,000 or their annual family income exceeds $200,000.
In this article we will explain the differences between two investment funds: Family Offices, focused on wealthy families, and Hedge Funds, oriented to individual or institutional investors.
What is a Family Office?
A Family Office is a privately held corporation that handles investment management and wealth management for a wealthy family. There is no specified threshold for what constitutes a Family Office. A typical Family Office has over $100 million in investable assets.
The structural purpose of a Family Office is to effectively grow and transfer, in a managed and controlled manner, wealth across generations. We live in unprecedented times of wealth transfer from parents to kids and the biggest erosion of wealth could occur in the transfer process.
What do Family Offices invest in?
Family Offices can invest in a variety of assets. The investment thesis and strategy is governed by the family’s matriarch and/or patriarch and is executed by the Investment Manager.
The most common are: private equity, venture capital, Hedge Funds, residential and commercial real estate. But not all Family Offices make investments. Some only allocate funds to outside managers. The investment categories and their relative proportion is aligned with the investment strategy and can vary from time to time.
In Alberta, where I live there is a proliferation of Family Offices. Many entrepreneurs created outstanding wealth during the oil and gas booms. Until recently, they were investing in more traditional industries. In the last 3 years, we have seen a noticeable shift and predilection towards technology leading to a rapid acceleration of the technology industry in Western Canada. This is not surprising as money chases returns. 50 years ago the list of Fortune 100 companies was dominated by industrial companies, whereas now that list is almost exclusively composed of technology companies or other similar companies that develop intangible assets.
What do Hedge Funds invest in?
Generally, Hedge Funds tend to invest in relatively liquid assets, which allows the investors to obtain large profits in a short period of time. Some examples of investments made may be land, real estate, currencies, derivatives or other types of assets. Those investments are typically over the counter, leveraging the public markets.
6 differences between a Hedge Fund and a Family Office
1. Type of Investors
The main difference between Family Offices and Hedge Funds is that, while Family Offices focus only on the needs and investment strategy of a single wealthy family, Hedge Funds serve the needs of individual or institutional investors.
2. Number of Investors
The investment in a Family office comes from a limited number of members of a single family who are related by blood or by marriage. On the other hand, the investors in a Hedge Fund are not related. Just like with a Private Equity or Venture Capital Funds, the investors are Limited Partners (LPs) in a Limited Partnership with the General Partner providing the management of the fund. The number of LPs in Hedge Funds significantly exceeds those in Family Offices.
3. Investment Strategy
Another important difference lies in the investment strategy. Family Offices tend to be more conservative. They are most like a Private Equity firm. Family Offices typically invest in assets such as: private corporations, publicly traded stocks and bonds. Hedge Funds, on the other hand, tend to adopt more aggressive strategies, and lean towards investments, such as: financial derivatives or commodities.
While Hedge Funds are managed by a team of professionals, Family Offices are typically managed by a single person.
5. Management and Fees
Given that the money in a Family Office comes from a single family, the Investment Manager is typically an employee of the corporation, receiving base compensation + bonus. Hedge Fund managers on the other hand are compensated based upon the investment performance of the fund and the quality of the underlying assets in that fund.
6. Investment Horizon
Family offices are focused on obtaining good, sustainable, long-term returns. They typically do not move in and out of an asset or an asset class. Their underlying principle tends to be Buy and Hold. Hedge funds, on the other hand, have a short-term investment horizon focused on maximizing returns.
If you are an entrepreneur seeking an investment, be sure to fully understand what is the investor/fund investment thesis and strategy, where is the investor on their investment horizon, what are the investable assets in their portfolio/fund, when, in what and how much was their last investment. Then tailor, tailor, tailor your pitch to the needs of the investor.