‘Family office’ means different things to different people. Some families see it as a platform to organise accumulated wealth and preserve capital. But for many Asian families and families aspiring to tap into the investment opportunities in Asia, the family office is also a manager to make the assets productive. If a family office serves the function of an internal fund, it would be managing a mix of asset classes under strategies usually in line with the special profiles and aspirations of the founding member or the key driving force of the family.
Family office as internal investment manager
Family offices might delegate investment advisory or management functions to such external managers as hedge funds, private equity funds or multi-family offices. Alternatively, the functions can be kept within the family office, managed either by a team of hired professionals or by trusted family members with an interest in and exposure to portfolio management.
When a family office takes on the role of an active investment manager, it also takes on the responsibility to oversee the implementation of the agreed investment strategies and decisions. An essential part of it is to find the optimal way to execute securities trades and keep records. In Europe and the US, where family offices have a longer history, bigger operations and more full-time staffing, it might be an easier task, but in Asia, where the family office trend is still new and constantly evolving, ready solutions are not always available to suit the particular needs of each family.
Hybrid between HNWI and institutions
Institutions such as hedge funds and other collective investment schemes go to the prime broker division of major investment banks for one-stop brokerage, margin facility and stock borrowing services. High-net-worth individuals (HNWIs) are serviced by private bankers who provide all-round, personalised offerings, from wealth planning to luxurious lifestyle perks.
Family offices using more complex strategies, such as short sale and futures or derivatives trading, are a hybrid of an institutional fund and an HNWI. Although they come in all shapes and sizes, family offices usually have more assets under management (AUM) than HNWIs, but might be small in Asia compared to large hedge funds or retail funds. A family might be able to tolerate higher risk than an HNWI and use its own in-house strategies to target higher returns, but large hedge funds might surpass them in the complexity of strategies, volumes and frequencies of trade. Asian family offices usually hire fewer staff than their Western counterparts and face less stringent or no regulatory requirements compared to external funds.
Making informed and conscious choices
Do internal fund managers use a one-stop-shop for banking needs, as hedge funds and HNWIs do? For example, if the internal fund needs to short-sell or make margin borrowing, a prime broker offers the ready solution. But it comes at an annual fee (unless the AUM is very high) and with additional service charges that are perhaps too high to make sense for the size of its AUM. Also, many prime brokers are used to serving large institutional funds. Some family offices are simply not big enough to interest prime brokers, and the fact that they are usually unregulated and operate with infrastructure unlike that of a typical fund makes client adoption less straightforward.
How about private banks, especially if there is an existing relationship with the family? They are a good starting point for family offices run by family members who prefer to outsource otherwise internal processes and are willing to pay for these services. But private banks have their own limitations in strategies, execution and settlement. Going back to my short-selling example, the private bank division would resort to the prime broker division in the same investment bank for stock borrowing, and there would be uncertainties in availability of the stocks and the cost. If the private bank division belongs to a bank that is not active in capital markets, stock borrowing might not even be available.
To create a suitable banking solution, family offices have to be informed and conscious. If no single provider or solution can fulfil all of its present or anticipated needs, a family office will have to mix, match and perhaps blend the offerings of private banks, global custodians, executing brokers and other service providers to build what is right for the family office and the family’s vision. If you are looking to expand into a multi-family office or formal fund offering in future, consider working with prime brokers when the right time comes. On the other side of the coin, it is equally important for banks to further explore and align with the financial services needs of Asian family offices. This is an underdeveloped yet promising market.
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