Family offices and HNWIs slowly trickling back into hedge funds

11 Feb, 2013

High net worth individuals (HNWIs) and family offices are slowly creeping back into hedge funds although inflows are unlikely to return to pre-crisis levels.

“We have seen family offices and HNWIs gradually return to hedge funds in the last three months although we are not witnessing a tsunami of fresh capital and it is very unlikely investments will reach pre-2008 levels,” said Phillip Chapple, managing director at KB Associates, a London-based consultancy focused on start-up hedge funds.

Family offices and HNWIs were burnt during the crisis and subsequent Bernard Madoff scandal with the experiences leaving a sour taste among many of them.  “Given the market uncertainty surrounding the PIIGS and several European banks, family offices and HNWIs are somewhat reluctant to rush back into hedge funds. But once these situations become clearer, I suspect these investors will become more confident,” he said.

The inflows may too be hit following the underperformance of numerous family offices over the last few years. A survey of European family offices by Campden Wealth revealed single family offices made just 3.6% in the first half of 2012 while multi-family offices generated less than 2% compared with 8% in 2011.

Many of these investors are shunning traditional equities, bonds and even conservative hedge funds in exchange for more defined risk and illiquid products such as property. “A lot of family offices and HNWIs are pursuing more defined risk and less liquid hedge funds. Many of these investors adopt a long-term approach to their investments,” said Chapple.

Smaller and niche hedge funds are likely to be the main beneficiaries of these modest inflows. “The managers which seem to be benefiting from these inflows tend to be those offering niche strategies or exposures to particular markets. It is the managers offering different products rather than a standard long/short equity shop which are going to get calls from family offices and HNWIs.”

Furthermore, the allocations appear not to be that substantial. “The inflows are not huge and the tickets are not that large. Most family offices and HNWIs are usually writing cheques for around $5 to $10 million,” continued Chapple.

HNWIsfamily officesKB Associatesilliquid
Winter 2013