Hedge funds face a new threat from richest families in Asia


SINGAPORE • They’ve already come for the talent, poaching traders from the likes of Millennium Management LLC. Now Asia’s family offices are going after the hedge fund industry’s clients, too.

Take Tolaram Group, which runs a US$500 million (RM2.08 billion) family office in Singapore. After hiring former Millennium and Goldman Sachs Group Inc staffers to manage US$100 million of its own cash, Tolaram plans to convert the portfolio into a hedge fund and accept outside money next year. It’s the first foray into asset management for a family that made its fortune in textiles, consumer goods and other mostly non-financial businesses.

Not content to simply cut costs by managing their wealth in-house, an increasing number of ultra-rich clans want to turn their family offices into revenue generators by charging the merely well-off to invest alongside them. While sceptics said conflict-of-interest concerns and limited track records may deter outside investors, the trend underscores the growing sophistication of Asia’s family offices and could pose a threat to incumbent money managers in a region that’s minting millionaires at the fastest pace worldwide.

“What we’re doing, I am sure other families will do in similar ways,” Manish Tibrewal, the CEO of Tolaram’s family office, said in an interview.

At least eight family and multifamily offices in Asia have recently started, or are planning to start, investment funds that accept outside money. They include AJ Capital Partners, which is currently applying for a licence to make its planned financial services-focused lending fund available to external investors by March, and Kamet Capital Partners Pte Ltd, which is planning a fund with a capacity of S$250 million (RM755.3 million) to invest in liquid assets.

Golden Equator Capital Pte Ltd, JM Enigma Capital Group Ltd and Golden Horse Fund Management Pte Ltd also have offerings in the works. They’re breathing fresh life into an idea pioneered in the US and Europe.

The family office founded in 1882 by oil magnate John D Rockefeller opened an asset-management and advisory business in 1979, while billionaire Michael Dell’s MSD Capital LP launched an entity offering select strategies to outside investors in 2009.

Quilvest SA, started by the family of German businessman Otto Bemberg, opened up its private equity fund of funds in 2002.

But Asia is now arguably the most important battleground for the world’s asset managers. The region is home to more rich people than any other after adding new millionaires at an annual rate of about 12% last year, data compiled by Capgemini show. In 2016, a fresh Asia billionaire emerged every other day on average, according to the UBS/PwC Billionaires Report.

Family offices have become an increasingly notable feature of the region’s wealth management scene. While each one is unique, they’re typically staffed by former investment bankers, hedge fund traders and private-equity analysts, overseeing investments that span both public and private markets. If managed well, they can give families more control over their assets and cost less than farming money out to hedge funds and private banks.

Entrepreneurial Family Family offices that take outside money see several advantages to opening up. For one, fee income helps offset the cost of hiring experienced investment professionals, which can quickly add up. At Tolaram, for example, the payroll now includes ex-Millennium trader Ankit Khandelwal, former Goldmanite Lee Kim Leng, and Liew Han Piow, who used to run the equity derivatives desk at United Overseas Bank Ltd. Other family offices in Asia have recently poached talent from firms including Deutsche Bank AG and GIC Pte Ltd, Singapore’s sovereign wealth fund.

External investors can also help instill family offices with a greater sense of discipline and professionalism. That’s especially important when aging founders begin passing the reins to younger generations.

It’s part of the “transition from family entrepreneur to entrepreneurial family,” said Thomas Zellweger, a professor of business administration at the University of St Gallen in Switzerland. The challenge, of course, is convincing outsiders to hand over their cash.

While family offices can tout their business acumen and show that they’ve got skin in the game, some observers question whether they’ll be able to compete with existing wealth-management offerings.

“I view this development with great scepticism,” said Claudia Zeisberger, a Singapore-based professor of entrepreneurship and family enterprise at Insead. “Asian family offices still have a way to go to achieve a level of institutionalisation that gives them the right governance structure, the right risk-management framework and the level of sophistication before they can start thinking about turning their family office into a business.”

Asia’s rich clans have a history of success when it comes to founding and operating companies, but many lack track records in money management of the sort that external investors often require. Another worry is that investment decisions could be unduly influenced by family members, whose objectives may not always align with those of the fund, said Vikas Gattani, the Singapore- based founder of a hedge fund that invests in Indian consumerrelated industries.

Sparse public statistics on funds run by family offices make it difficult to draw definitive conclusions about their results. The few that do disclose performance figures include Golden Equator Prime Currency Income Fund, which returned more than 20% since its inception in 2015, and Thirdrock Asian Affluence Fund, a longshort Asia equity fund that gained 8.3% from January 2015 through June.

The Eurekahedge Asia Long Short Equities Hedge Fund Index climbed 24% during the same period.

The strategy Tolaram plans to use for its hedge fund returned 12% in 2016 and 10% last year. It plans to charge external investors a 2% management fee and a 20% performance fee, versus industry averages of about 1.3% and 16%, respectively.

“The new funds will only gain traction if they can compete with the existing hedge fund industry, both in terms of returns and fees,’’ said Mohammad Hassan, an analyst at Eurekahedge Pte Ltd in Singapore.

Only time will tell how family office funds perform over the long haul, but Tolaram’s Tibrewal is confident of one thing: More of them are coming.

“Asia generates a billionaire every other day,” he said. “The logical extension is that a lot more family offices will be opened. They’ll want to extend their asset-management offering to outside investors.”