The historical importance of family offices to the hedge fund industry has been well recorded. As Rick Flynn, the head of Rothstein Kass’ Family Office Group noted this year in his firm’s “Industry Outlook”, “Back in the mid-to-late ’90s, family offices were some of the earliest movers into the hedge fund space.”
It was asserted here last year that getting to know how family office potential clients operate may be the most important task of internal marketers of hedge funds, and, to a similar degree, of third-party marketers (see this story). In the results of Rothsteins Kass’ 2012 survey of 400 hedge funds it seems that the managers recognise that potential.
Across six sources of capital the survey respondents, nearly all of them hedge fund managers in the United States, family offices were ranked highest as the most important source of capital. The results are shown in the graphic below,
Hedge fund managers like the responsiveness of family office CIOs – they often have the ability to allocate to a manager within a very short time of the first meeting, if they like what they hear. In many ways family offices are amongst the last bastions of entrepreneurialism on the buy-side of the hedge fund business.
As Rothstein Kass’ Flynn put it “Many of the families with whom we work not only have maintained their interest in hedge funds, but have increased their efforts to include seeding and outside investment advisory services.” This could well be a crucial function for the growth potential of the industry. The largest allocators, the pension plans of the U.S., have to date stuck with the largest managers in the hedge fund universe. But survey evidence suggests that they are beginning to look below the Billion Dollar Club members.
It should be that the hedge fund managers that family offices are allocating to now will be those that the state retirement plans are allocating to in a couple of years. That would be beneficial to the health of the wider hedge fund industry.