Eager to escape more scrutiny and red tape from regulatory reform, some hedge fund managers are closing shop to concentrate on managing money for themselves, relatives and essential employees as unregistered family offices.
The billionaire hedge fund pioneer Stan Druckenmiller shuttered Duquesne Capital Management last year and returned around $12 billion that it had managed for outsiders.
He then set up a family office to manage his own investments, according to spokesmen.
The hedge fund manager Chris Shumway seems to be taking a similar route.
His Shumway Capital Partners is in the process of returning money to outside investors and will manage "internal assets only," Shumway said in a Feb. 4 letter to investors.
However, the firm said it isn't about to become a family office — an indication, perhaps, of how movement in the rarefied world of managing wealth for the super rich can be subtle and subject to interpretation.
Jeffrey Rankin of Rankin Group, a 25-year-old consultancy to family offices in Lake Geneva, Wis., said four or five hedge fund principals a year have called it asking about closing hedge funds and opening family offices since the 2008 financial crisis.
"We're talking to several of them right now," he said. How many were bringing up the topic before 2008? "Zero."
Family offices are private wealth management entities that number a few thousand and generally cater to families worth at least a few hundred million dollars.
Hedge fund managers are smart to consider the move, according to Andrew Schneider, managing partner at HedgeCo, a database provider to the hedge fund industry.
"In a business that's gone from $200 billion [of assets] to $2 trillion, you have a lot of managers who have made a lot of money in the past 10 years," Schneider said.
Besides being rich enough to make managing their own assets a full-time job, some hedge fund principals are unhappy about new compliance and regulatory costs stemming from recent financial reform legislation, Schneider said.
Under a law passed last year, hedge fund firms that manage more than $150 million have a few months to register with the Securities and Exchange Commission. This means keeping the agency up to date on investment and business practices, employing a chief compliance officer to create and monitor a compliance program and submitting to SEC examinations and inspections.
Some hedge fund managers object to such oversight — and not just because it costs them more in time and money.
Rather, Schneider said, they view the disclosure as a case of "giving away the secret recipe" and fear the watchdog will do more to stifle creativity than prevent fraud.
Some family offices must also register as investment advisers with the SEC. But entities that serve the immediate family of the founder, its essential employees and family controlled charitable vehicles are exempt — with no limit on the dollar amount an exempt family office may supervise.
