The more common move to shift from hedge fund to closed family office was popularized by large hedge funds and hedge fund managers like George Soros (Trades, Portfolio), Carl Icahn (Trades, Portfolio), and Steve Cohen’s SAC Capital Advisors (now Point72 Asset Management). Some estimates suggest that there are over 1,000 different family offices throughout the nation. The Dodd-Frank Act went into full effect in 2010, causing many hedge fund managers to rethink their positions.
Going Against the Trend
Several family offices are going against the trend by becoming hedge funds fully open to new investors. Although popular discourse has suggested that this is a negative move, many family-office-to-hedge-fund conversions are based on sound business planning.
The legitimacy of switching from a hedge fund to a family office is generally only applicable in situations where the hedge fund manager controls extensive capital. For instance, George Soros (Trades, Portfolio) was able to start his family office with a hefty $24 billion to invest. Of course, as a family office, the Soros Fund Management LLC cannot solicit outside investors or manage any money that does not belong to the Soros family.
For family offices that do not have $24 billion in capital to work with, remaining in business as a family office limits their investment options. Thus, the small undercurrent of family offices opening their doors isn’t exactly a negative for most operations.
Who Are These Hedge Funds?
Although few in number, family offices turned hedge funds have been popping up over the last few years. Cube Global Opportunities Fund, for example, began operation in 2009 as a family office. During that time, they focused on event investments (like mergers or other big developments). Despite new legal regulations in the US, the Cayman Islands-registered fund decided to offer its services to outside investors in 2012. The legislation had already taken effect and notable hedge funds had already switched to family office operations.
Yet, the Cube Global Opportunities Fund opted to shift gears and become a hedge fund. At the time of their founding, Cube managed over $100 million in assets—a considerable amount but still a far cry from George Soros (Trades, Portfolio) territory. They thought the best way to increase capital was by offering their services to a wider variety of investors.
Another family office following in Cube’s footsteps is the Lion Star Fund. It started in 2006 as the Lion Star Family Fund with a comparatively small $500,000 initial investment. The New York-based family office is making its shift to ahedge fund this year.Registered in the British Virgin Islands, the new Lion Star Fund is only accepting clients outside of the US. This is an effort to avoidregulations from the Securities and Exchange Commission (SEC). In their eight years of operation as a family office, the Lion Star Family Fund was able to earn over $10 million on the original $500,000 investment. Their main areas of investment include metals, currencies, and developed countries’ indices.
Numerous other funds have made the switch in recent years, including Cornwall Capital and Pacific Venture Investments. All of these former family offices made the switch as a way to operate a larger amount of investment capital.
In many cases, the switch from family office to hedge fund produces positive results for most everyone involved. Of course, the relatively recent introduction of the Dodd-Frank legislation and the fact that many of its regulations aren’t being fully enforced may be factors that limit the effectiveness of some of these ventures. Most family offices have a leg up on start-up hedge funds, however. The fact that they maintain existing capital and have made successful business decisions prior to becoming open to outside investors gives them a better background with more experience. They also, of course, have a solid framework for managing and investing money.