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The voice of experience – advice for hedge fund families

Fred Fruitman is managing director at Loeb Partners, the investment arm of the Loeb family, which today manages its own hedge fund. Click here to read about families who have set up their own hedge funds. Asked by Michael Fischer what advice he would offer other family offices interested in marketing a hedge fund product, Fruitman makes several important points…

Fred Fruitman, managing director at Loeb Partners, says that before a family offers a hedge fund product to outside investors, it should make sure it is committed to the asset category in which it intends to invest. Loeb Partners had been a longtime investor in arbitrage before it opened its Loeb Arbitrage Fund to outside investors.

In addition, says Fruitman, it makes sense to have an investment track record in the asset category and a management team in place that the family has worked with and trusts before launching a product. In other words, "don't come up with an idea, then go out and hire somebody to do it."

Moreover, creating a hedge fund product should be primarily for the benefit of the family and the management team, says Fruitman. Certainly outside investors count, he says, "but you really need to have that staying power that is a function of having longevity and commitment to the asset category. You have to be prepared for bumps along the way; you don't want fickle outside investors pulling out their money after you've built up this overhead."

Fruitman says a family can be tempted to view a hedge fund offering as a way simply to make a lot of money for the family, but there should be stronger motivation to create a product. "It also has to be a way for your team to profit because you need to keep that team. One of the reasons to do it is to reward and keep the team that is managing an asset for you, that has made you money in the past, that you're happy with, that you want to keep and that you want to grow with. This is a way to do it."

He notes that the world is getting tougher, and asset categories are becoming more complex. They require more overhead in terms of people and expertise and systems to run. "You have to make sure you have what you want in place first and are happy with it, and the reasons for growing it are establishing a bigger critical mass to keep your team in place and add to that team over time to continue to have this competitive advantage or edge that you believe you have in managing this particular asset category." Offering a hedge fund to outside clients is a way to spread that overhead over a bigger investor base and getting a bigger critical mass.

To read Michael Fischer's article on families who have set up and managed their own hedge funds, click here.

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