So, it looks like SAC Capital has decided to take its ball and go home. News broke on Monday that SAC Capital had agreed to plead guilty to insider trading charges. Again. So Steve Cohen’s hedge fund will pay out $1.8 billion, $900 million in fines and another $900 million in forfeited profits. They will get to count the $616 million they paid the SEC in March after the last time they pleaded guilty to insider trading charges, so it’s a mere $1.2 billion that Steve Cohen will have to pay out at this point.
And then on Tuesday, SAC Capital announced to its staff that it would no longer be managing public money, instead becoming a Family Office. This should come as no surprise given that part of the SEC settlement had SAC agreeing to stop operating as an investment advisor and to stop accepting funds from third-part investors.
"While today's agreement means we will not manage outside capital for the foreseeable future, we will continue to operate much as we do now, but as a family office," wrote Tom Conheeney, SAC President, in an e-mail to staff.
"We anticipate that our registration will be revoked by the SEC," he continued, "but it will not affect our ability to operate as a family office."
Of course, being a Family Office wouldn’t make insider trading any more legal, but it does change things for SAC Capital. Now, instead of a hedge fund managing public money, it’s a private advising company dedicated to Cohen’s $9 billion or so along with his family and a couple of SAC Capital employees.
What is a Family Office?
The Family Office dates back to the 19th century, and they have long been the bastion of some of the world’s greatest fortunes. The Astor family used one to manage their considerable assets in the 1830s, and John D. Rockefeller set one up in 1882 around the time he had more money than God. And a Family Office remains a popular method for managing funds for the super rich today, with some 3,000 such firms managing about $1.2 trillion as of May 2012.
The benefits of a family office today haven’t changed much since the days when the Astors ruled New York City: privacy and control. It’s a simple way to keep a close eye on your money. It remains an expensive solution, costing more than $1 million a year in some cases. Meaning that, in order for it to make sense, there usually has to be a lot of money involved. A whole lot.
Types of Family Offices
There are two basic types of family offices: single-family offices (SFOs) and multi-family offices (MFOs). And the distinction is…exactly what the name indicates. SFOs manage the wealth of a single family, usually one worth hundreds of millions of dollars or more, while MFOs open their doors to more clients.
While a MFO clearly doesn’t offer all the same advantages that an SFO does in terms of privacy and exclusivity, they’re also available to a much broader audience. There are only about 5,000 families in the United States with $100 million or more to invest, but multi-family offices can open up the 100,000 or so households with $5 million to $10 million to invest. Still, $5 million is near the low end of what most MFOs will accept. Typically, MFOs have a floor of $20 million before they’ll consider a client, with the average client being worth $40-$50 million.
However, for those entering into an MFO, it typically means saving money. Fees for MFOs are lower, typically between 0.25 and 1 percent of assets a year. By bundling many services, MFOs can cut some costs, resulting in fees to each family that can be lower for clients than separate SFOs by as much as 20 percent.
And, ultimately, even SFOs offer a cost-effective model for certain families. When there’s enough money and enough investments involved, it begins to become more efficient to keep your investment services in house. However, it does take considerable wealth before the benefits outweigh the costs.
"In a single family office, it is often difficult to have the breadth and depth of expertise required to build truly diversified portfolios,” Daniel Pinto, founder of MFO Stanhope Capital, told the Wall Street Journal. “Screening and selecting managers across asset classes and regions takes a large team."
New Dodd-Frank Oversight
One advantage for Family Offices from an investment management perspective has been that SFOs, which had fewer than 15 clients, were exempt from registering under the Investment Advisers Act of 1940. However, 2010’s Dodd-Frank Act eliminated this loophole. The new regulations, which the SEC finalized on June 22, 2011. The new rules are designed to ensure that hedge funds, the primary target of Dodd-Frank, wouldn’t be able to slip regulations by using the same loophole that SFOs rely on.
“The definition of family office provided in the rule is designed to limit the exclusion from Advisers Act regulation solely to those private advisory offices that we believe the Advisers Act was not designed to regulate and to prevent circumvention of the Adviser Act’s protections by firms that are operating as commercial investment advisory firms,” the SEC said in the final rule.
This means that SFOs now have a narrower scope to focus on lest they fall under the newly watchful eyes of the SEC.
“The new exclusion is narrowly drawn,” says a HUB International white paper from May 2012. “Qualifying single-family offices must serve only family clients who are direct relations. In-laws don’t qualify, nor do business partners or other outsiders. However, certain key employees may qualify as family clients. Only family clients and key employees can have ownership stakes in the family office, but key employees may not control the family office, and the family office cannot manage investments for any outsiders. Foundations and charities that have received funding from non-family members must spend that outside money if the family office is to continue handling the foundation’s investments.”
The Rich Just Keep Getting Richer
While Dodd-Frank may create some headaches for those SFOs that weren’t paying attention, or MFOs that previously stayed under the 15-client exemption, the availability of family offices remains another example of an advantage the super rich can count on to stay above the fray that the majority of investors can’t count on. Damn Rockefellers.
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