Wall Street still digesting Archego debacle
WealthSpire Advisors Senior Vice President Oliver Pursche, Belpointe chief strategist David Nelson and Payne Capital Management senior wealth adviser Courtney Dominguez analyze today’s markets.
Enormous losses at Archegos Capital Management have cast a rare spotlight on the growing influence of below-the-radar institutions around the globe called family offices.
These firms, which manage huge piles of wealth for individuals or families, are proving to be increasingly important to the financial system. Just 121 of the largest single-family offices represent an estimated net worth of $142.4 billion, according to a report last year by UBS Securities . Sixty-nine percent of these offices were established since 2000, the report found.
As they have grown in size, some family offices have embraced the riskier investment strategies used in previous decades by the most aggressive hedge funds. This is a departure from more traditional family office investments in stocks and bonds—as well as private equity and venture capital, which in recent years have become much more competitive.
The shift in behavior has raised concerns on Wall Street and may have contributed to last week’s liquidation in excess of $30 billion of positions held by Archegos and its banks. The family office Archegos manages the wealth of investor Bill Hwang.
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“Hedge funds used to take on lots of risk and swing for the fences, but now it’s often family offices,” said Joseph W. Reilly Jr., chief executive of Circulus Group, a consultant to family offices based in Greenwich, Conn.
“I’m surprised something like this hasn’t happened before,” he said, referring to the losses at Archegos.
A growing number of family offices are comfortable with risk, according to professionals in the business. More hedge fund founders and traders have shifted to the family office world, both to start such firms or to work at them, and they have sometimes brought aggressive tactics with them.
Billionaire traders including George Soros, John Paulson and John Arnold have all closed hedge funds to start family offices. At the same time, entrepreneurs and other business owners who built their fortunes with big bets can also embrace those kinds of wagers when investing their cash.
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The former manager of Tiger Asia Management LLC, Mr. Hwang comes from the hedge fund world. His firm ran $5 billion at its peak. After it suffered losses and paid fines to settle an insider-trading case, Mr. Hwang turned Tiger Asia into his family office and renamed it Archegos.
“First-generation beneficial owners are, by definition, risk takers,” Josef Stadler, the head of the global family office business at UBS, wrote in the firm’s 2020 report.
The appetite for risk has been stoked by global investment banks, which in recent years have come to see booming family offices as potentially lucrative clients as hedge funds have encountered struggles.
Banks sell various products to family offices, much as they do to hedge funds, including advice on private-equity and other investments. They also sell them complicated derivatives, including the swap agreements that led to Archegos’s sudden losses as shares of ViacomCBS Inc. and Discovery Inc. tumbled.
Family offices don’t have a fiduciary duty to keep their trading limited, and don’t have nervous investors to deal with. This can add to firms’ comfort with risk, say some who work with family offices.