Family Office vs. Hedge Fund

For an investor, choosing the right investment strategy is key to wealth generation. For an entrepreneur, knowing where to hunt for money could be the difference between success and failure. Indeed, with so many increasingly greater options, it can be difficult to navigate.

A credentialed investment professional can work with you to develop your investment strategy based on your needs for money, investment horizon, and risk appetite. Accredited investors have a myriad of options available to them. An accredited investor is an individual whose net worth exceeds $1,000,000 or whose annual family income exceeds $200,000.

In this article, we will explain the differences between two investment funds: Family Offices, which are focused on high-net-worth families, and Hedge Funds, which are oriented toward individual or institutional investors.



What is a Family Office?

A Family Office is a privately held corporation that handles investment management and wealth management for a wealthy family, often functioning as a private wealth management firm. There is no specified threshold for what constitutes a Family Office. Single-family offices, which serve a single high-net-worth family, are becoming increasingly prevalent globally. A typical Family Office has over $100 million in investable assets.

The structural purpose of a Family Office is to effectively grow and transfer wealth across generations in a managed and controlled manner. We live in unprecedented times of wealth transfer from parents to kids, and the biggest erosion of wealth could occur in the transfer process.



What do Family Offices invest in?

Family Offices can invest in various assets. The investment thesis and strategy are governed by the family’s matriarch and/or patriarch and executed by the Investment Manager as part of the overall investment portfolio. Multi-family offices, which serve several clients and allow for cost-sharing among multiple families, are more common than single-family offices.

The most common are private equity, venture capital, Hedge Funds, and residential and commercial real estate. However, not all Family Offices make investments. Some only allocate funds to outside managers. The investment categories and their relative proportion are aligned with the investment strategy and can vary from time to time.



In Alberta, where I live, there is a proliferation of Family Offices. Many entrepreneurs created outstanding wealth during the oil and gas boom. Until recently, they were investing in more traditional industries. In the last three years, we have seen a noticeable shift and predilection towards technology, leading to a rapid acceleration of the technology industry in Western Canada. This is not surprising as money chases returns. Fifty years ago, the Fortune 100 companies were dominated by industrial companies, whereas now, that list is almost exclusively composed of technology companies or other similar companies that develop intangible assets.

What do Hedge Funds invest in?

Generally, Hedge Funds tend to invest in relatively liquid assets, which allows the investors to obtain large profits in a short period. Some examples of investments made may be land, real estate, currencies, derivatives or other types of assets. Those investments are typically over the counter, leveraging the public markets.



6 differences between a Hedge Fund and a Family Office

1. Type of Investors

The main difference between Family Offices and Hedge Funds is that, while Family Offices focus only on the needs and investment strategy of a single wealthy family and its family members, Hedge Funds serve the needs of individual or institutional investors.

2. Number of Investors

The investment in a Family office comes from a limited number of members of a single family who are related by blood or by marriage, managing their family assets. On the other hand, the investors in a Hedge Fund are not related. Just like with a Private Equity or Venture Capital Funds, the investors are Limited Partners (LPs) in a Limited Partnership with the General Partner providing the management of the fund. The number of LPs in Hedge Funds significantly exceeds those in Family Offices.

3. Investment Strategy

Another important difference lies in the investment strategy and the personalized services offered. Family Offices tend to be more conservative. They are most like a Private Equity firm. Family Offices typically invest in assets such as private corporations, publicly traded stocks and bonds. Hedge Funds, on the other hand, tend to adopt more aggressive strategies and lean towards investments, such as financial derivatives or commodities.

4. Management

While a team of professionals manages Hedge Funds, Family Offices are typically managed by a single person, focusing on asset management for high-net-worth individuals and families.

5. Management and Fees

Given that the money in a Family Office comes from a single family, the Investment Manager is typically an employee of the corporation, receiving base compensation + bonus. Hedge Fund managers on the other hand are compensated based upon the investment performance of the fund and the quality of the underlying assets in that fund.

Family offices also handle everything from investing strategy to tax and estate planning, offering personalized services centred around the client's goals.

6. Investment Horizon

Family offices are focused on obtaining good, sustainable, long-term returns. They typically do not move in and out of an asset or an asset class. Their underlying principle tends to be buy-and-hold. Hedge funds, on the other hand, have a short-term investment horizon focused on maximizing returns.