What is the Difference Between a Family Office and a Hedge Fund?

Family offices and hedge funds are two types of wealth management tools designed especially for individuals and families with high net worth. Hedge funds offer protection from bearish markets with their diversified and heavily managed assets. Family offices go above and beyond wealth management, offering a team of professionals to provide comprehensive wealth management services to families covering investments, assets, estate management, and concierge services for daily living.

What Is a Family Office?

Family offices provide comprehensive wealth management services for individuals with ultra-high net worth and their families. Families with assets of $100 million or more commonly have family offices. In addition to regular wealth management services, family offices handle financial and investment concerns for a family, including budgeting, taxes, charitable giving, and insurance policies. The services offered by a family office are comprehensive and require a team of professionals specialized in areas, including investments, estates, insurance, taxes, and law. 

Family offices may handle the financial concerns for one or more high-worth families. Multi-family offices, known as MFOs, offer a more cost-effective way for different families to share services. Family offices have numerous sizes, structures, and strategies.

Family offices have staff explicitly designated to provide selected services to families, varying from setting up trusts to non-financial tasks like managing travel and other household business through concierge services. Each family will have unique needs and specialized staff for managing their financial and investment needs.

How Do Family Offices Help Wealthy Families?

Family offices adapt to fit the needs of their client families, assembling a team of professionals to meet wealthy families’ unique needs. This type of wealth management is becoming more popular as families seek to manage their capital to weather changing economic conditions. Family office services range from financially focused to turnkey concierge services.

Professionals are dedicated to managing assets and cash, handling risk management, and financial planning on the financial side. Hedge funds, geared toward high-dollar investors, are commonly part of a family office’s offerings. Family offices seek to preserve and grow capital, meeting the long-term strategies of the family. Investment management fees on investments can be lower, and investments can be tailored to meet long-term goals. While institutional funds often look a decade into the future, family offices can manage investments with a plan to hold and grow them over generations.

Families with substantial wealth also seek to continue their legacy to the next generations. Family offices manage trusts, charitable endeavors, transfer or management of the business, and sales of assets. Personal assets, including real estate, can also fall under the control of a family office.

Family offices don’t just manage the financial and investment concerns of a family. They also help educate family members as younger generations navigate managing their finances and handling wealth transfers. Family offices also help coordinate wealth transfer plans and limit conflicts among family members.

Family offices also may handle concierge services for families—spanning a wide range of unique offerings from travel management, business operations, personal staff management, and security services. Turnkey services also include paying bills and handling check writing to pay for purchases and recurring expenses.

What Are the Trends for Family Offices?

Family offices are growing in popularity as families seek comprehensive management of financial, investment, and other concerns. Family offices vary significantly in size, from a small staff to handle investments and estate matters to a large team of dedicated staff that manages concierge services like travel coordination and financial education for younger generations.

Investment banks also are courting wealthy clientele, offering services that cover the needs of family office principals and their staff members. Family offices are becoming more common, and businesses will continue to target services to this sector.

What Is a Hedge Fund?

Hedge funds are designed to protect assets from market volatility, which means they are heavily managed; fees are higher and minimum deposits can be increased in exchange for reduced risk.

Hedge fund managers may borrow money as part of their strategy for providing solid returns for their clients. They borrow money to increase holdings in an asset to multiply potential earnings or losses. Hedge fund managers have flexibility in managing their funds, as they aren’t as regulated as mutual funds are by the Securities and Exchange Commission (SEC).

Hedge fund managers may also receive performance fees when returns are high, expenses that could reach 20%. Managers have numerous strategies, investing in different markets, securities, and sectors. Hedge funds may hold underpriced stocks for a longer time while selling short overpriced stocks, taking advantage of opportunities to profit from both as prices move.

Hedge funds require substantial minimum investments and often must be held for over a year, with withdrawals limited to quarterly or bi-annual intervals. They can be focused on industries or markets, discrepancies between the valuation of investments, or anticipate events like corporate bankruptcies.

Can Hedge Funds Transform to a Family Office?

Hedge funds offer some of the unique investment flexibility that high-wealth families need. They can convert to family offices after undergoing changes and additions:

• Investments in the hedge fund are returned to all non-family owners, as family offices have one principal. Families can also withdraw assets and create their entity.
• Family offices add a level of privacy and control over investments and business affairs. SEC registration isn’t necessary, reducing costs.
• New functions like concierge services and private asset management need to be built out and customized to meet the family’s unique needs.

Our Team Can Help

The Pasquesi Sheppard Family Office Services staff is ready to help high-net-worth individuals and families with a wide array of services. As leading accountants and consultants, we are uniquely qualified to deliver services and provide tax advice. Contact us today to learn more about hedge funds and family offices. You can reach us by phone at 847-234-5000 or via our secure online messaging service. A knowledgeable team member would be happy to answer any questions you may have. We will be glad to show you how we can become a valuable financial partner.