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Poor performance fuels family office conversions

Falling returns, rather than regulatory reasons, might explain the growing number of hedge fund managers converting into family offices in the US, say experts.

Falling returns, rather than regulatory reasons, might explain the growing number of hedge fund managers converting into family offices in the US, say experts.

Sophie Dworetzsky, a partner at international law firm Withers, reckons that tougher times is making the family office model more attractive. “The financial situation now is causing people to move away from being a bigger hedge fund managing a lot of money to a multi or single family office,” she said.

Barbara Vannotti-Holzrichter, head of fund research at Rothschild Wealth Management, added: “Whilst there is not enough evidence to constitute a trend, the moves from hedge fund to family office are a reflection of the fact that it is more difficult to do well in the hedge fund space today.”

Their comments follow the latest announcement by US hedge fund Scottwood Capital that it is returning money to outside investors and becoming a family office managing the family’s wealth.

The Greenwich, Connecticut-based hedge fund, founded by Edward Perlman, plans to return around $470 million of its outside capital, and cited a combination of regulatory uncertainty and a risky credit market for the decision.

Hedge funds are saying that new rules requiring them to register with the Securities and Exchange Commission are forcing them to become single family offices. To comply with regulations, family offices and hedge funds that offer advice to clients outside the founding family have until the end of March next year to register with the SEC.

But in reality, declining returns might be playing a bigger role in these conversions.

George Soros, who converted his hedge fund into a family office in July, said he blamed the new regulations for the move. But he also said that today’s market volatility and unpredictability meant making money is harder than ever. His hedge fund had reportedly lost 6% in the first half of this year.

Scottwood Capital’s performance has shown plenty of volatility. It had poor returns in 2008, but revived in 2009 and early 2010. But from April last year, the fund fell again losing more than 6.5% of its value in 2010.

But Dworetzsky also reckons that once it becomes easier to make money, single family offices will again be tempted to change.

“The recent conversion is possibly a part of their long term strategy to broaden investments outside of just hedge funds. Once returns go up, they will convert into a multi family office,” she said.

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