Senior private banking figures who regularly comment about family offices argue that calls to regulate FOs in the wake of the Archegos blow-up are misguided and could do more harm than good.
Regulators and other policymakers thinking of targeting family offices after the Archegos meltdown may have legitimate worries about this affair, but it is wrong to pillory the family office sector, and the risks arise elsewhere, senior figures in the sector say.
In early April, Dan M Berkovitz, commissioner, at the Commodity Futures Trading Commission, called for tighter regulatory oversight of family offices. Berkovitz said: “Unfortunately, in the last two years the CFTC has loosened its oversight of family offices. In 2019, and again in 2020, the Commodity Futures Trading Commission (CFTC) approved rules that exempted family offices from some of our most basic requirements.” He claimed that he had objected to the change.
With Gary Gensler taking up his post as new boss of the Securities and Exchange Commission, all eyes will be on what regulators might do.
Under the Joe Biden administration – expected to hike taxes on the wealthy – and a Democrat-controlled Congress, there are fears in the wealth industry about the position of family offices. The industry, depending on various estimates, oversees a global total of as much as $6 trillion in assets. (Exact figures are hard to pin down.) In the Archegos case, the business, which was a New York-based hedge fund run by Bill Hwang, did not manage third-party money, and was structured as a family office. As a result, it avoided regulatory oversight from the SEC. In 2019 the CTFC took a similar stance – family offices don’t have to register as commodity pool operators (CPOs) or provide annual notice to this effect.
A few hedge fund tycoons, such as George Soros and Steve Cohen, had morphed their firms into family offices over the past decade, albeit for different reasons. (See here for a roundup.)
Regulating family offices, rather than the individuals who take their decisions and the banks’ lending to them, will be a grave mistake; it will undermine the positive value family offices have in encouraging the use of patient capital, transferring wealth responsibly down the generations and steering philanthropy, Bill Woodson, executive vice president at Boston Private, and leader of its Family Enterprise Services Group, said in a recent note. (He co-authored that note with Richard Perez, a managing director and chief strategist at Boston Private.)
“We believe the concerns expressed by Commissioner Berkovitz, while understandable in that they convey shared disbelief and outrage that this happened, do not accurately depict family offices, the role they play in capital markets, the merits of the regulatory exemptions granted to them, or, indeed, their importance to wealthy families and, by extension, society,” Woodson and Perez said.
“Much reference has been made to the exemption family offices received from registration as an investment advisor following the 2008 to 2009 financial crisis and the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” Woodson and Perez continued. “It is, however, important to note that the exemption for family offices from the Dodd-Frank reforms was not because they differ from hedge funds in terms of the magnitude of wealth they control or their trading sophistication. Instead, it was because they, for the most part, do not manage money for anyone other than family members or senior family office executives. And those family offices that do manage money for unrelated third parties must register as investment advisors and/or CPOs.”
Alastair Graham, who founded and runs the Highworth Research database on single family offices, had told this publication a few weeks ago that the vast majority of family offices don’t engage in the kind of highly leveraged trades of Hwang at Archegos, and that such entities tend to be lenders of credit, rather than takers of it. They tend to be relatively conservative in their investment time horizons, he said. (This is often, in fact, why family offices are targeted by private capital markets operators, because they tend to invest in terms of decades.)
The issue of whether an Archegos-type meltdown brings systemic
risk is not an easy one to resolve. Some regulators still recall
the Federal Reserve-led rescue of Long Term Capital Management
(LTCM) in 1998. That firm had lost billions of capital via what
turned out to be wrong-way bets on equities and bond markets. In
the Archegos affair, Credit Suisse,
Nomura and a number of
other banks, including Goldman Sachs,
Stanley, Citigroup, BNP
Paribas, Deutsche Bank and
UBS have been hit. At
Credit Suisse, several C-suite figures, including its risk chief
left and been replaced.