Without proactive risk controls, family offices are at increased risk of being caught in the crossfire when hedge funds get over-leveraged, as happened in the recent firesale forced on the banks by Archegos Capital Management.
Family offices in Asia have been digesting the news about the problems surrounding Archegos, a family office run by former Tiger Asia fund manager Bill Hwang.
Last month Archegos defaulted on margin calls from investment banks including Credit Suisse, Nomura, Goldman Sachs and Morgan Stanley. The banks have lost in the region of $1 billion to $5 billion each as a result of having to offload stock in the firesale. Hwang reportedly lost $8 billion in 10 days.
At a headline level, it is Hwang, the banks and prime brokers who have taken the biggest hit. “This one single client has taken away two years’ of profit from one bank. That’s an insane amount of concentration risk,” Timothy Tsui, a Hong Kong-based private investor and family office manager told AsianInvestor.
He added that there are lessons to be learnt from this for family investors.
“Do your own homework and don’t over-leverage.” he warned.
Family investors are naturally untrusting of third-party managers, but Tsui said younger family members given investing responsibility should not let their guard down in the pursuit of higher returns.
“Above all, families should not trust their money with people who have admitted to insider trading,” he said, referring to Hwang being fined $44 million by US regulators over illegal trading charges in 2012 and being subsequently banned from trading in Hong Kong in 2014.
Tsui added that risk management for families is very important, as is the way the family’s investment team reacts in a crisis.
“Having risk controls is one thing, but you must act on them, even though there’s a lot of pressure if you’re the risk officer of a billion dollar portfolio. Your entire year’s performance can be gone in a day if you make the wrong decision."
Gary Tiernan, managing partner at Singapore multi-family office Golden Equator told AsianInvestor, “Unfortunately, there is a long history of investors losing money with firms like Madoff, Long-Term Capital Management, and Amaranth, after being attracted to funds without carrying out sufficient investigation and monitoring.”
Risk management should be deeply ingrained in the investment practices of all family offices, he said. “Risk is inevitable with investments. It is not something that must always be avoided, rather it is something that must be understood and managed.”
Kelvin Fu, CIO of Indonesian family office Gunung Capital confirmed that they allocate to managers across the alternatives space, including private equity/venture capital and hedge funds. But he said he was not unduly worried by the Archegos blowout.
“Bill (Hwang)’s family office was a special case, as that was his background in hedge funds,” Fu told AsianInvestor.
NEXT GEN PRESSURE
Increased risks are emerging because of the desire of next generation family members to invest in new high returning investment opportunities.
As Benjamin Cavalli, head of private wealth for South Asia at Credit Suisse said at the bank's annual Asian Investment Conference in late March: "There is a massive wealth transfer, to the tune of around $40 trillion going to happen in the next decades. So that’s a huge opportunity and risk to many family institutions, especially if the next generation shuns their traditional private bank advisers.”
Jason Hsu, CIO at Rayliant Global Advisors in the US, agrees this generational shift is putting tension on the traditional investment preferences of wealthy families.
“In my dealings with family offices in Asia, mostly in Greater China, I’ve seen a shift,” he told AsianInvestor. “Now, with second generations involved, educated overseas and in some cases having gained experience in financial markets, what you’re actually seeing is a push to diversify away from traditional investments like real estate. That’s always a hard argument to make to the family patriarch.”
Speaking at the Credit Suisse conference, Jo Jo Kong, who helps to manage her Malaysian family’s office, RHL Ventures, confirmed this push for greater diversification, especially into the latest growth trends.
“I started off with a very simple motive, which was to have my family’s participation in the tech industry. I saw that the tech industry was giving really phenomenal returns and I didn’t want my family to miss out from an investment perspective,” she told the conference.
“We’ve had situations where I thought this is a really good opportunity, but my father was more confident in pursuing something where he already had a strong relationship with somebody. I think that’s a common issue with family offices,” said Heleen van Poecke, investment manager with AtlasInvest, a private investment company focused on conventional oil and gas and renewable energy.
Kong said the generational tug-of-war is becoming more real. “The first generation entrepreneur mentality, to put it lightly, means they trust very few people apart from themselves to manage the family’s money. It’s really hard for a foreign VC to come and unlock this wealth, regardless of their investing history.
Hayley Mole, senior associate at Flat World Partners agreed about the 'FOMO' mentality among the next-generation investors.
“In my role, I’m working with everyone from old guys at pension funds to amazing next gens who see private equity as mainstream now. These investors are moving into more risky assets, venture capital among them."
Hsu told AsianInvestor some family offices lean on professional gatekeepers to bring them deals, but that trust may be misplaced.
“In Asia, these new family offices are viewed as more naïve. They may be more likely to be preyed upon in terms of what is put in front of them and the terms they can get. I think many of them are now taking on risks and paying fees that are not very sensible.”