The Richest Families In The World Are Staging A Quiet Rebellion Against Hedge Funds

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It's no secret that since 2008, most hedge funds have lagged the S&P 500. Because of that, now the world's richest families are starting to wonder if hedge funds are really worth their incredibly expensive price tag.

And they're starting to ask hedge fund managers some tough questions about it.

Yesterday, Bloomberg hosted a conference called "The Hedge Funds Summit" for (you guessed it) hedge funds and the people that invest in them. Many of the attendees were from Family Offices — investment houses where the fortunes of the world's wealthy are put to work.

As you can imagine, hedge funds want a piece of that action. That's why a solid portion of the afternoon was spent discussing Family Offices, though hedge funds probably didn't like what these juicy potential clients had to say.

"We're quite skeptical in general... of the hedge fund industry," said Andrew K. Tsai, Co-Founder and managing principal, Chalkstream Capital Group.

Sixty-one percent of all hedge fund money is concentrated in the hands of the top 100 hedge funds, and Tsai went on to say that that concentration makes for some wacky correlations his office would stay rather away from.

However, Tsai did say that his office is willing to seed smart hedge fund managers that have solid strategies for specific sectors.

"We don't think of hedge funds as an asset class, we think of them as a way to get exposure to something," said John O'Hara, Senior Advisor and Managing Director, Rockefeller & Co.

And that's a word panelists used over and over again — exposure. Family Offices consider hedge funds a tool in their arsenal — one that should be applied at a certain scale completely dependent on risk.

Usually, a Family Office's money comes from a long-only investment (like a family company), so they want to be able to hedge against that by getting exposure to say, the short side or the credit space.

O'Hara, who manages money for the Rockefeller family, said specifically that his office is interested in gaining exposure to what he considers the great investing themes of the day — the "silver tsunami" (aging Baby Boomers), North American energy Independence and more.

So you need to have the right stuff if you're going to reel in these big fish, and even if you do they're not going to go easily. Time and time again these money managers said that they didn't care about past performance, they want hedge fund managers to show them a solid, well-informed strategy, or as Bob Rice, Managing Partner, Tangent Capital said — "when are you going to lose money?"

Family Offices want to have a frank discussion about a hedge fund's risks and limitations. Gone are the days when they were willing to plunk down the infamous 2% and 20% (or more) compensation scheme with only the promise that hedge fund wizards would work their magic over every quarter no matter what the circumstances.

Rice, who is also the author of The Alternative Answer: The Nontraditional Investments That Drive the World's Best-Performing Portfolios , said bluntly that a lot of hedge fund managers aren't earning their keep.

Family Offices aren't the only power house investors talking about this either. Rice said that he was speaking with New Jersey Pension Fund CIO Timothy M. Walsh and that Walsh said that he was fed up with the compensation scheme hedge funds were asking for.

Essentially, Walsh asked Rice why he should pay a hedge fund 2% and 20% when his fund could go to an asset manager like Blackstone and get more bang for its buck.

It's a dangerous question for all the lagging hedge funds out there.



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