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Private Investment Forum - Fall 2012


The Top Four Mistakes Family Offices Make in Investments



You meet one family office, you meet one family office.” Each family office (FO) is different from the other with its own story and path it took to create wealth.Some made their money in the real estate sector, others were entrepreneurs who sold their technology company, another may have been an industrialist and some may have inherited the wealth.Each family office has numerous relatives who may or may not be interested in getting involved.Each family has a unique approach to investing: some do it all in- house, some bring an outside chief investment officer to oversee the investments, and for some the patriarch of the family calls all the shots. Despite all these differences in what make up a family office, there are some commonalities among them, particularly the mistakes they make when it comes time to investing.Below are the top four greatest mistakes I have observed throughout the many years I’ve worked with affluent families.
  1. We can do it all. This approach to managing investments says that the FO investment manager oversees each and every type of investment and plays the role of stock picker, bond picker, analyst of the cash management needs of the family, real estate investor, evaluator of direct investment opportunities in various and diverse companies, and hedge fund allocator. Clearly, this is a significantly long list of responsibilities to be managed by just one person. I believe that each investment professional has his strengths and weaknesses and while he may be very good at picking stocks, for example, he may not be the best analyst to evaluate a new multifamily real-estate opportunity.Additionally, no matter how great a talent she is, there are only 24 hours in one day.The world is moving into specializations and I believe strongly that while some investment tasks should be kept in- house, others should be outsourced to investment professionals who are dedicated to that asset class.

  2. Golf / Cocktail investing - Investing in a specific fund because my friend recommended it.Does this sound familiar? You went golfing with your friends or met a friend for dinner and he told you about a great money manager that is making lots of money for him. Next day back at the office, you call your financial advisor and tell him you want to invest with this specific money manager. Perhaps this strategy would have worked well in the past, but then Madoff / Stanford / Peregrine (fill the name of your favorite fraud) happened and investors lost ALL their money.While I believe that most of the industry managers are hardworking, honest people looking to make money for their investors and themselves, unfortunately there are also people that are involved with fraud and deception.As such, before making any allocation to a hedge fund or a money manager it is important that a proper due diligence take place. Some ways to conduct this due diligence include speaking with the prime broker and administrator of the fund to verify the assets under management and the asset class held by the money manager; it is important to receive this data in writing from the service provider. One should also obtain the most recent audited financial statements for the fund provided by the manager: when are they issued? Who is the auditor of the fund? How long has the auditor been working with the manager? If the audit firm is unknown, one should verify that they have an expertise in hedge funds and other hedge fund clients.A background check on the manager is also recommended to make sure there are no pending lawsuits or investigations by the SEC against him. This investigation process offers the investor peace of mind knowing whether their money is being managed by honest and experienced people that are focused on generating returns. The hope is that the investor does not wake up one day to read about the portfolio manager of their hedge fund trying to escape from the FBI.

  3. Investing that is based on past performance only – “chasing returns”.One of the first things that investors look for when evaluating alternative investments, such as hedge funds, is to look at their historical performance. It is only natural to want to know how well the fund performed in different market environments. But we also shouldn’t forget that past performance is only a guarantee for past performance and if we were not invested in the fund at those periods of time then we didn’t enjoy these returns.Perhaps the manager got lucky and had one great trading idea that generated most of these profits? Maybe it was another portfolio manager that generated most of the gains but by now has decided to retire or leave the firm? In an environment where everybody is chasing performance it is very tempting to give money to a money manager just because his track record seems attractive. Nonetheless, it is crucial to conduct a proper due diligence on the investment process of the fund, to get to know the portfolio manager and his investment style, and monitor the fund for some time prior to allocating money to it.A useful technique is to look at a portfolio manager’s actual performance only after meeting with him. This allows one to form an opinion about the money manager and his investment style first and then to use his real results to allow for a more broad opinion.

  4. Investing in a fund based on conversation with the marketing / investor relations person of the fund and not with the portfolio manager. One of the positive consequences of the 2008 financial crisis has been the demand for increased transparency in the financial industry. For hedge funds managers this means spending more time speaking with their existing and potential clients and discussing their strategy and current holdings. One of the byproducts of this approach was the increase in number of individuals involved with the marketing / investor relations of the funds.These marketers serve as ambassadors of the fund and the face of the hedge fund manager. It is easy to forget that at the end of the day, they are not the investment professionals who are responsible for generating investment ideas, trading, and generating profits. As such, when an investor considers allocating money to a money manager it is crucial that he speaks directly with the portfolio manager of the hedge fund to understand the investment process of the manager, how repeatable the process is and so forth.This may seem obvious to many, however unfortunately too many investors neglect to do this. Investors need to remember that it is their money they are giving to someone else to manage and they should speak to the portfolio manager no matter how large the size of the hedge fund.

Conclusion:Family offices have a wide array of investment opportunities; they can choose to invest directly into a company, deal or transaction or they can decide to allocate their funds to outside money managers.In either case a proper due diligence should take place by those who are responsible for the investments.In case the knowledge and expertise does not exist in house and in order to avoid costly mistakes it is strongly recommended to outsource these specific tasks to mitigate risks associated with the investments and make better informed decisions.

About Ten Capital Advisors
Ten Capital Advisors is an independent New York based hedge fund advisory company focused on providing customized solutions to its clients regarding their investments in hedge funds.To learn more and take the next step to tailor your own portfolio of hedge funds please contact Ronen Schwartzman at Ronen@ten-capital.com.




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