Private Wealth Management

Private Wealth Management Trends

Below is a short excerpt from a recent article I wrote for Investopedia on family offices and private wealth management trends:
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Family offices are private wealth management advisory firms that serve ultra-high-net-worth clients. There are more than 3,500 family offices based in the United States. By offering a complete outsourced solution to managing finances and investments, including budgeting, insurance, charitable giving, family-owned business, and wealth transfer and tax services, these offices set themselves apart from traditional wealth management firms. Although they vary in their level of service, most typically invest heavily in consultants, databases and analytical tools that help them conduct due diligence on money managers or optimize a portfolio of investments for tax purposes.

In this article, we'll review the top three trends affecting family offices, including the rapid growth of the family office industry, the types of family office services provided, and the increasingly sophisticated use of hedge funds and alternative investments by both single and multifamily offices.

Family Office Facts
There are two types of family offices: single-family offices (SFOs) and multifamily offices (MFOs). Single family offices serve one wealthy family, while multifamily offices operate more like traditional private wealth management practices with multiple clients. Multifamily offices are much more common because they can spread heavy investments in technology and consultants among several high-net-worth clients instead of a single individual or family.

Tackling the Trends
Prominent trends fueling the growth of family offices include:

There is a growing number of high-net-worth and ultra-high-net-worth classes around the world. In most developed nations, the wealthy are accumulating assets more rapidly than the middle class. At the same time, many emerging economies are thriving, with annual growth rates of 4-8%. Many experts have noted that by 2015-2020, China's upper class will be larger than America's middle class. Growth in countries such as China, Brazil, India and Russia will ensure that the family office format of wealth management services continues to grow in popularity over the next five to seven years. (To learn more about emerging economies, see What Is An Emerging Market Economy? and Demographic Trends And The Implications For Investment.)
Profitability is a growing challenge for family offices. As populations amass greater wealth, large wealth management firms are competing on a cost basis and moving a larger portion of their core services online. While the average person might appreciate saving hundreds or even thousands of dollars in fees each year, many affluent individuals would much rather spend $20,000 to $100,000 a year to ensure that experienced professionals are managing their investments and taxes to fit their specific financial goals and risk tolerances. Read more...

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Prime Brokerage Hedge Fund Administration

Prime Brokerage + Administration

Prime Brokerage & Hedge Fund Administration

More prime brokerage firms are adding on administration services to help attract and retain clients. I wasn't sure how widespread of a trend this was but saw this mentioned within an article yesterday as noted below. I would be interested in discussing this further with hedge fund managers reading this article - if you have some insight - Richard@HedgeFundGroup.org.
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In recent years, the custodian banks that have acquired hedge fund administrators have sought to adjust client lists in favor of larger and more profitable hedge fund and fund of funds groups interested in a broader array of services. At the same time, prime brokers have recognized that providing administration services can help attract and retain clients and counter the shift among hedge fund managers towards multiple prime brokerage.

"It would be surprising if the hedge fund administration industry continues to support such a large number of providers, and there is now evidence that a renewed round of consolidation is in the offing," says Dominic Hobson. "However, the appetite to sell may be offset as well as encouraged by the depressed prices available. In any event, the buyers are likely to be different from the banks which dominated the acquisition process in the early years of this century." Read more...

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Asian Prime Broker Growth

Asian Prime Broker

Asian Prime Broker Growth Trend

Quick Link: List of Hedge Fund Prime Brokers

Here is an interesting article about the growth of prime brokerage services in Asia. I didn't know that growth was so strong for these groups right now...

Citigroup expects the amount of assets serviced by its Asia Pacific prime brokerage arm to grow by more than 30 percent annually over the next three to five years, as more global hedge funds set up shop in the region.

Even with tumbling stock markets hammering Asia's hedge fund industry, many large international managers are doing more business in the region, drawn by its long-term potential, said Hannah Goodwin, head of Prime Finance, Asia Pacific for the U.S. banking giant.

"We're looking at a 30 to 50 percent growth every year," she told Reuters in an interview. "That's how aggressive we want to be with this business and how well we think this business is going to develop for us." Read more...

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FAS 157

FAS 157 Implications & Notes

The hedge fund industry has significant concerns with recent best practices recommended by the President's Working Group on Financial Markets regarding the disclosure of the valuation of managed assets centered on FAS 157 fair value accounting. In a letter to the Working Group, the Managed Funds Association said that the ambiguities of fair value accounting work against achieving a consensus on proper valuation of a hedge fund’s portfolio assets. The MFA also noted that the recommended disclosure goes beyond the requirements of FAS 157.

The Working Group issued complementary sets of best practices for hedge fund managers and investors in the most comprehensive effort yet to increase accountability for participants in the industry. The Working Group called on hedge fund managers to adopt comprehensive best practices in the critical areas of disclosure, valuation of assets, risk management, and conflicts of interest. Specifically, the Working Group said that fund managers should provide financial information supplementing FASB Standard No. 157 to help investors assess the risks in the valuation of the fund's investment positions.

Depending upon the extent to which the fund manager invests in illiquid and difficult-to-value investments, noted the Working Group, the disclosures should occur at least quarterly and include the percentage of the fund's portfolio value that is comprised of each level of the FAS 157 tripartite valuation hierarchy. Level 1 is comprised of assets with highly liquid market prices, while Level 2 assets have no quoted prices but there are similar assets with quoted prices. Level 3 is for illiquid assets that have to be priced using models.

The group also said a best practice would be to set up a Valuation Committee with ultimate responsibility for reviewing compliance with the fund manager's valuation policies. Further, the group said that independent personnel should be in charge of the valuation of the fund's investment positions. While broadly agreeing that investors would benefit from disclosure of hedge fund valuation policies, the MFA noted that there is much ambiguity and a lack of consensus among managers, counterparties and accounting professionals as to the appropriate treatment of a number of products under FAS 157 such that the Working Group’s recommendations may not be achievable. Further, the lack of consensus is likely to result in inconsistent disclosure across the industry, which could be both confusing and potentially mislead investors.

Thus, until a greater consensus exists with respect to implementation of FAS 157, the MFA asks that this recommendation be deleted. The MFA noted that fund managers will still be required by their independent auditors to follow the procedures specified in FAS 157, as the industry continues to develop consensus on the implementation of those procedures.

The committee also recommended that hedge fund managers disclose the percentages of a fund’s portfolio value for which a manager relied on one dealer quote and multiple dealer quotes. The MFA believes that this disclosure could also be misleading to investors since there are certain types of products for which one dealer quote is used in valuing the asset, even though there is a liquid and deep market for the product, such as certain types of OTC products. There may also be products for which multiple quotes are available, but for which there is not a particularly liquid, active and deep market. While the availability of multiple dealer quotes may be an indication of the level of market activity for an asset, said the MFA, it may be misleading in certain instances. As such, the group was urged to delete this recommendation.

While agreeing that the valuation function should be independent of the portfolio
management function in order to reduce conflicts of interest, the MFA believes that
the recommendations are confusing when read in conjunction with the make-up of the proposed Valuation Committee. The Working Group said that the Valuation Committee may include members of senior management who have portfolio management responsibilities. However, the recommendations also discuss segregation of valuation personnel from portfolio management personnel. To the extent that a Valuation Committee is partially comprised of senior portfolio managers, reasoned the MFA, then the desired segregation of personnel does not seem possible.

Guest post by James Hamilton

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FIN 48

FIN 48 + Implementation & Disclosures

A growing chorus of hedge fund and private equity groups has asked FASB for an exemption from FIN 48, a FASB interpretation of a standard on accounting for income taxes. In a letter to FASB, the Managed Funds Association said that the sophisticated investors that invest in hedge funds do not need the enhanced disclosures that FIN 48 was designed to provide. In its letter, the Private Company Financial Reporting Committee stated that private company financial statement users find the accounting matters and disclosures encompassed by FIN 48 to be largely irrelevant to their decision making. The committee’s also noted that FASB and the IASB are working on a convergence project on accounting for income taxes and that this may significantly affect FIN 48. Thus, if FASB is unwilling to grant hedge funds an exemption from FIN 48, the private fund groups ask that the Board at least postpone the effective date of FIN 48 pending completion of the convergence project.

FIN 48 was adopted to provide for increased relevance and comparability in financial reporting of income taxes and to provide enhanced disclosures of information about the uncertainty in income tax assets and liabilities. The genesis of FIN 48 is FASB Statement No. 109, which established financial accountants and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. It requires an asset and liability approach to financial accounting and reporting for income taxes

While acknowledging the need for FIN 48-type disclosures in the case of companies offering securities to the investing public, the MFA pointed out that the institutions and individuals that invest in private investment funds do not fall within this category. Hedge fund investors typically conduct extensive due diligence assisted by their own lawyers, accountants and other advisers, noted the MFA, and they often request, and receive, additional information, including tax information, if they believe that such information is material to their investment decision.

Moreover, private investment funds with U.S. investors are treated as partnerships for Federal income tax purposes. As a result, a private investment fund is not itself a taxpayer. It files an annual information return with the IRS, said the MFA, and each investor in the fund pays tax on its pro-rata share of the income of the fund. Thus, while fund personnel have historically focused substantive attention on issues surrounding the proper allocation of taxable items in a partnership environment, explained the MFA, it has been unnecessary for them to devote substantial time to traditional FAS 109 accruals.

For this reason, private investment funds are incurring significant costs in preparing to comply with, and complying with, FIN 48. Even more, many private investment funds make investments outside the United States, said the MFA, and FIN 48 will require them to make an additional layer of judgments concerning uncertainties in the tax laws of other countries.

Finally, the MFA noted that hedge funds need to determine NAV with reasonable frequency, both to establish a price for investments and redemptions, and also for other purposes. As a result of the fiduciary nature of the NAV calculation, and economic fairness to investors that subscribe and redeem at that amount, the MFA believes there are substantial questions whether FIN 48 analyses should be reflected in the NAV of a private investment fund.

The MFA is aware that SEC has concluded that FIN 48 analyses should be reflected in NAV in order to give investors more disclosure. Significantly, however, the SEC said its guidance was limited to assessing tax positions reflected in NAV calculations subject to the Investment Company Act and should not be applied by analogy in other cases.

The MFA believes that there are differences between public and private investment companies that warrant a different conclusion with respect to private investment funds. The MFA stands ready to make a more comprehensive submission on this point if the FASB believes that it would be of assistance.

Guest post by Jim Hamilton

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Sustainable Investing

Sustainable Investing & Hedge Funds

Socially responsible investing or SRI as it is sometimes called is set to be much more than a blip on the radar screen of high net worth and institutional investors alike. Just earlier this week there was a new green hedge fund launched.

Another article on this appeared in the FT this week. Here's a quick excerpt:
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Wealthy people increasingly want to invest their money without harming the environment, possibly heralding the mainstream take-up of such investment principles.

"Even those who aren't actually doing it are talking about it," said Matt Christensen, executive director of the European Social Investment Forum, which has surveyed both rich individuals and the wealth managers who look after their money about the topic of sustainability.

Nearly three-quarters of respondents have seen an increase in interest in sustainable investing in the last 12 months, according to the Eurosif survey, which also forecasts more than €1,000bn (£805bn, $1,473bn) of rich people's money will be in sustainable investments by 2012. This represents a near doubling of the absolute levels in 2007, and a proportionate increase from 8 per cent to 12 per cent of rich people's wealth.

New money, either from people who have recently become wealthy, or new flows from established investors, is driving the flows into sustainable investment strategies or instruments.

"Successful entrepreneurs of today are not the industrialists of yesterday," said one survey respondent. "They are younger and more interested in sustainable investments."

Historically, rich people have led the way in investment trends, taking up hedge funds and private equity before these asset classes became generally popular. Read more...

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Hedge Fund Business

Succession Planning & Hedge Fund Business Tasks

Over half of all hedge fund failures are business related.

Many institutional investors now scrutinize the business a hedge fund is running as much as they do their investment returns. This is important to note as many of even the largest hedge funds fall short within areas such as long term compensation, retirement, risk management and succession planning. To be fair many hedge funds are very performance-based and some see high turnover so spending much time on planning long-term for leadership grooming may not be a wise investment of time. That said, many small funds who are just breaking through the $100-$250M threshold often have dozens of processes, policies and institutional business risk management controls to set in place to please institutional investors and family offices.

Here is a recent article excerpt on this topic:
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Hedge fund firms often pride themselves on being ahead of the curve on financial trends but roughly 70 percent lag behind on planning for their own futures, according to a study to be released on Tuesday.

"Regardless of firm size, most participants have not taken all of the necessary steps to ensure a smooth transition in the event of a change in the senior management team," said Rick Flynn and Alan Kufeld, who provide tax, accounting and consulting services to hedge funds as principals.

While hedge funds used to be small businesses managing several hundred million dollars, the industry has grown up and many fund firms now oversee several billion dollars for big clients such as pension funds that want to see a succession plan.

But most fund managers acknowledge they haven't thought that far ahead. Less than one quarter of the respondents said they have agreed on a formal succession plan and fewer than 30 percent said they are ready to deal with the death of a managing partner, according to the data.

"This lack of preparedness poses a threat to both the role and personal wealth of the principal and will almost certainly affect the other owners of the management company as well as investors in the firm's funds," wrote Flynn and Kufeld about the results. Read more...

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Gottex Fund William Landes

Gottex Hedge Fund

Gottex Fund Management - William Landes

Products as the one below are interesting to watch grow, or not as they try to sometimes sell products to groups which traditionally have build their own portfolio's in-house with the aide of consultants.

The following piece on Gottex Fund is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Resource #1: (5.10.09) Swiss fund of hedge funds shop Gottex Fund Management has taken a controlling stake in U.S-based firm SJC Capital Partners.

The U.S. asset management firm, which was founded last year by Stephen Czech, specializes in provided secured loans to middle market companies that are unable to obtain loans from traditional sources due to the credit crisis.

Gottex is banking on the direct lending market, which its expects to continue to be “a very attractive investment space in the years to come as traditional financing sources for the middle market continue to contract or exit this market segment.” source

Resource #2: Swiss funds-of-funds firm Gottex Fund Management is launching a fund that will emulate the investment principles of U.S. “super endowments.” The new fund will emulate the investment principles of successful U.S. university endowment funds, such as Harvard and Princeton. It will allocate about 65% to alternative investments.

The alternative part of the portfolio will cut across all asset classes: hedge funds, private equity, commodities, long-only equity, fixed income, real estate and other real assets. Harvard Management, long the model for university endowment funds currently with about $35 billion in assets, increased more than 20% year over year in 2007.

William Landes is helming the new fund. Landes joined Gottex from Boston-based 2100 Capital, his hedge fund specialty firm that Old Mutual Asset Management bought in 2005. Before that Landes was a money manager at Putnam Investments, which helped incubate 2100 Capital. Landes’ experience with broad-based funds was part of what led him to Gottex, he told HedgeFund.net.

“This is something I’ve been doing for over 15 years,” Landes said. “So when Joe Gottschalk [CEO of Gottex] and I began talking about the possibility of me coming over, we started talking about ways to provide sophisticated investment for high net worth investors.” In preparation for the new fund launch, Landes said his team determined that a 65% exposure to alternative investments combined with traditional investments did the best in the long term. Read more...

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Asset Management Finance Corp

Asset Management Finance

Asset Management Finance (AMF) Corporation

The following piece on Asset Management Finance Corp is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.

This story is about how Credit Suisse purchasing Asset Management Finance Corp. which provides funding to early stage hedge funds in exchange for revenue sharing on future fund earnings. It will be interesting to see if Credit Suisse significantly alters AMF's due diligence process while looking at funds, or presses them to fund Credit Suisse associated groups...
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Credit Suisse Group AG, Switzerland's second-biggest bank, bought New York-based Asset Management Finance Corp. for $384 million to provide financing to investment firms.

Credit Suisse paid stock for more than 80 percent of the firm, founded by former Putnam Investments chief Norton Reamer in 2003, from a unit of National Bank of Canada. Reamer, 72, who also ran Boston-based United Asset Management Corp., will stay on, the bank said today in a statement.

AMF, which provides capital to money managers including hedge funds in exchange for a slice of revenue, will benefit from Credit Suisse's global reach, said Brian Finn, chairman of the Zurich-based company's alternative-asset business. The unit, which manages $167 billion, holds a minority stake in hedge-fund firm Ospraie Mangement LLC and has started joint investing ventures with Abu Dhabi and General Electric Co.

AMF ``is a platform with a leadership team and an investment approach in which we see enormous growth opportunities,'' Finn said in an interview. Read more...

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Viresco International Capital Management Karim Salamatian

Viresco International

Viresco International Capital Management - Fund Profile

While this fund seems especially timely given the current commodity/gas pricing environment I have always thought green hedge funds would consistently increase in terms of number of players and demand in the future, when I started this blog I predicted green hedge funds to be one of the top 5 high growth niche areas of the industry.

The following piece on Viresco International Capital Management is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Viresco International Capital Management is surfing the green wave with the launch of a clean technology fund. The San Diego-based firm has recently launched the Viresco Opportunities Global Fund, a long/short hedge fund that aims to capitalize on the worldwide boom in clean energy and technologies.

“Viresco Opportunities Global Fund’s objective is to achieve superior absolute total returns through investment in clean technology,” states the fund’s offering memorandum, which was obtained by FINalternatives. “Viresco achieves this investment objective by actively managing a globally diversified portfolio consisting primarily of long and short strategies of publicly traded clean technology equity, debt and derivative securities on a leveraged basis.”

The offering documents say that the fund is unique, “because it covers the entire global spectrum of clean technology verticals. This strategy allows for diversification, risk management and predictability.” The fund is being managed by Karim Salamatian, a partner and chief investment officer at the firm. Prior to joining Viresco, Salamatian was a managing director with BMO Capital Markets in Toronto, Canada. Read more...

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The Spanish River Group Stephen Hansen

The Spanish River Group

Spanish River Group - Hedge Fund Profile

Another example of how even in a tough market when many funds are closing there are others launching hedge funds who come from large hedge fund shops with experience in the industry. Many times the launch of the hedge fund has been in the making for 1-2.5 years before doors are fully opened so current market conditions don't have a large effect on those taking a serious approach to the business.

The following piece on The Spanish River Group is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Veteran hedge fund professional Stephen Hansen has gone into business for himself. Hansen, who has worked for fund-of-fund Common Sense Investment Management, Fullerton Capital and Drakes Landing, started The Spanish River Group in May.

Based in Florida, The Spanish River Group or TSRG is a long-short equity strategy with a bottom-up approach to stock picking. The hedge fund has no sector bias. Hansen characterized TRSG as using value and momentum investing.

TSRG launched with $900,000 in capital and has a 1.5% management fee and a 20% performance fee as well as a $250,000 minimum investment. Piedmont is the administrator. Harb, Levy & Weiland is the auditors. North Point Trading is the prime broker. Hansen said he wanted TRSG to amass $1 million in its first year. Read more...

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Eurasia Capital Management

Eurasia Capital Management - Hedge Fund Press Bio

Below is a press bio on Eurasia, they are the first group to offer a Mongolia-centric hedge fund product. I expect these types of announcements to greatly increase as the barriers to trading in countries such as this drop, hedge funds look for a distinct advantage and traditional "emerging" countries such as China and Brazil fully emerge.

The following piece on Eurasia Capital Management is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool

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Eurasia Capital Management plans to increase the world's first Mongolia-focused fund fivefold to $100 million to tap economic growth fueled by the nation's mining industry.

Eurasia's hedge funds, which have about $200 million of investments across Central Asia, also expect to sell shares on London's Alternative Investment Market or Deutsche Boerse AG by next June, said Alisher Djumanov, managing partner of the Singapore-based firm. Proceeds would be used to start private- equity and property funds, and expand in Central Asia, he said.
Mining in Mongolia, which has reserves of coal, copper, gold and uranium, will spur ``double-digit'' economic growth rates over the next 10 years as commodity prices remain high, Djumanov said in an interview. Mining accounted for about two- thirds of Mongolia's exports last year, and foreign direct investment in the country rose more than 33 percent.

``The spillover effect from the mining sector will be significant,'' Djumanov, 35, said. ``We're investing in companies that are expected to grow significantly on the back of this strong economic growth.'' Read more...

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Halcyon Asset Management | Hedge Fund Tracker Profile

Halcyon Asset Management

Halcyon Asset Management - Hedge Fund Press Bio

The following piece on Halcyon Asset Management is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Resource #1: Look who's sitting atop one sector of the hedge-fund world.

Joe Wolnick, 53, the head of Halcyon Asset Management's $850 million Asset Backed Securities hedge fund, is up 3 percent through Sept. 30, making him one of the only ABS funds with a positive return through the first three quarters of 2008.

The top-of-the-heap position is especially sweet for Wolnick - who started running his first hedge fund just three years ago after a career spent working as a credit risk executive in the distressed consumer and corporate debt business - because he relishes using his street smarts and gut instincts to beat his Ivy League rivals at other firms.

Wolnick, who proudly trumpets his 1977 graduation from Central Connecticut State University on Halcyon's Web site, held back from buying senior subprime mortgage-backed securities earlier this year despite their high yield. The trader, people familiar with his thinking say, expected the bonds to fall from their lofty prices in the high-60-percent and low-70-percent range.

While others were buying, Wolnick was out soliciting investor cash, waiting for prices to drop and his chance to pounce. This summer, Wolnick beat out 70 other funds to manage a piece of California's San Bernadino pension fund.

At that point, the market started to notice Wolnick.

By September, prices indeed came down below 50 and Wolnick started buying. Although just a portion of his portfolio, the index of senior tranche of subprime MBS closed the month at 52.08, helped him achieve his 3 percent gain and his prized place atop the heap.

In contrast, two of the most successful hedge-fund traders of recent years, Michael Novogratz and his protegeAdam Levinson, who run Fortress Investment Group's $9 billion Drawbridge Global Macro fund, which also invests in asset-backed securities, find themselves in an unusual spot - down 13.76 percent through Sept. 30. Read More...

Resource #2: The vice chairman and chief investment officer of hedge fund Halcyon Asset Management has been forced out. The move reportedly follows major redemptions from institutional investors. According to an investor letter dated Tuesday and obtained by The New York Post, Steve Mandis has left the firm, "effective immediately."

While the letter gave no reason for his departure, FINalternatives has learned that the subsidiary of the $12 billion hedge fund run by Mandis has been performing poorly and that some of the fund’s largest investors are pulling their money.

One source told FINalternatives that it was an “unceremonious” departure. “They are being hit with large redemptions,” said the source. Halcyon declined to comment on the matter.

The subsidiary, Halcyon Structured Asset Management, was co-founded by Mandis in 2004. Mandis also served on the boards and risk management committees of Halcyon and all of its affiliates, except for Halcyon Real Estate Investors.

Prior to joining Halcyon, Mandis worked at Goldman Sachs, where he served as a portfolio manager in the firm’s Special Situations Investing Group, a multi-billion dollar proprietary investing area within Goldman Sachs' Fixed Income Division. Read more...

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