Once a family has decided to set up and manage its own hedge fund there are many factors that must be considered. Michael Fischer interviews two families who have already taken the plunge to see what can be learned from their experiences
Families set up asset management firms and launch hedge fund products for a variety of reasons. Often these businesses are an extension of a family's internal management of its own investments – perhaps starting with friends investing alongside the family, and evolving into a fully-fledged asset management operation. In other instances, an asset management firm may be part of a family's business plan from the outset, perhaps started by an entrepreneur who enjoyed success in another sphere or experienced a major liquidity event and wants to embark on a new venture.
The decision to start a hedge fund business quite often relies on the merit of the family's professional investment staff. In a familiar scenario, a well-credentialed investment professional with expertise in alternative investments comes on board to manage a family's assets, and diversifies the portfolio by introducing hedge funds into the mix. In order to hold on to this valued employee, especially if he/she has an entrepreneurial tendency, the family may allow him/her to spread his/her wings by launching a hedge fund product and sharing in the revenues.
There are many ways to approache hedge funds and the following are examples of two very different approaches. Loeb Partners, the single-family office of the Loeb family in New York, launched a hedge fund, initially for the family and a strategic partner, which eventually grew into a $1 billion entity with a carefully selected investor base. In Paris, Marc Landeau, a successful broker, transformed the skills he had developed investing in hedge funds on his and his family's behalf into The Olympia Group, which offers funds of hedge funds to global institutional investors and, though a multifamily office, to high net worth French families.
A rich history of investing
In 1979, Loeb Rhoades was the fourth largest investment banking firm in the US, when the Loeb family sold its brokerage business and several ancillary assets to Shearson Hayden Stone, keeping just the corporate entity, renamed Loeb Partners, to manage the family's own affairs.
Loeb Rhoades dated back to 1937, when the family office of Carl Loeb acquired Rhoades & Co, a brokerage firm. Loeb was a German immigrant who had become wealthy over the previous decade and had bought a seat on the New York Stock Exchange with his two sons to run their own investment firm. Over the next 40 years, Loeb Rhoades grew by acquisitions to become a major player on Wall Street.
Loeb Rhoades always had a proprietary arbitrage desk, doing mainly merger arbitrage for the family's own account. When the Loebs sold the brokerage operations 1979, they kept the arbitrage desk, among several other assets, and brought in Arthur Lee from Lehman Brothers to run the desk.
In January 1988, the family set up the Loeb Arbitrage Fund in partnership with AIG with which it had a longstanding relationship. The only outside investors in the hedge fund, which had about $40 million under management, were a few close associates and entities controlled by AIG. However, debate went on in the family about opening the fund more broadly to outside investors. The Loebs' big concern, says managing director Fred Fruitman, was this: do we really want to be in the business of servicing other investors and taking on the responsibilities and liabilities that go with that?
The family finally opted for slow growth. Over 15 years, the firm took on three or four new investors a year, primarily other high net worth families the Loebs knew, growing to its current base of 50 to 60 families.
In the late 1990s, as the fund reached a critical mass, institutional investors began knocking on the door. By then, says Fruitman, it had become apparent to both the people running the portfolio and to the family that the business was becoming much more complex and competitive. To maintain its competitive advantage, Loeb Partners needed to bring on more and better people. To do this, the firm needed a bigger critical mass and revenue stream.
Fruitman emphasises that a balancing act has been necessary in growing the firm. It is critically important to avoid taking fickle money: "You bring in lots of outside money, revenue stream goes up, you take on lots of new staff; then outside investors change their mind and pull their money, and you're left with big overheads." He notes that Loeb Partners has a very good group of long-term investors. He also says that growing too rapidly can dilute returns. One reason Loeb Partners always grew very slowly, he says, was that the family and AIG were in the fund for the returns, and they did not want to do anything that would jeopardise its returns.
The Loeb Arbitrage Fund, which started off focused on merger arbitrage, has since morphed into a true multistrategy product, migrating between merger arbitrage, distressed, event-driven and value strategies, depending on where it finds the best opportunities.
Loeb Partners at present comprises some 60 people; about half are involved in the Arbitrage Fund, and the rest are involved in managing the family's assets, taxes, administration and other matters. The firm has a compensation system whereby a very generous portion of profits, without limit, goes to professionals on staff, says Fruitman.
Shaking up the old guard
Marc Landeau, 63, is the American-born and educated son of French parents. Before founding The Olympia Group, he built a successful career at Drexel Burnham Lambert (USA), where he was a first vice president before taking over the firm's Paris office as its managing director. In 1989, he started his own asset management business. "I realised that although I was running Drexel in Paris and was a very good broker, I wasn't a very good asset manager, so I started handing money to outside managers for myself and my family. Then I said, what's good for the goose is good for the gander, and that's when I started."
Olympia was among the first firms in France to offer hedge funds products, and it was difficult to win regulatory approval for his project, says Landeau. "At the time, wealthy people didn't invest in funds vehicles; those were for the lower income classes." High net worth investors, he says, had their money managed in a bespoke way by traditional shares and bonds. "So, first, a funds business was already something different. Then, going into alternatives, which we started in 1990, was unheard of."
In 1997, Landeau invited his brother-in-law, who held a senior position at a French private bank, to start a family office, another Anglo-Saxon institution unheard of in France. He says the family office today manages some $400 million for French entrepreneurial families.
Over the past 18 years, The Olympia Group has developed into a very healthy business with more than $5 billion under management, as funds have become an accepted investment vehicle in France and alternatives have entered the mainstream. The firm's product range of multimanager products includes diversified, thematic, customised and subadvisory portfolios. Its flagship Olympia Star I Fund of Funds has generated positive returns every calendar year since its inception in 1991. Today, the firm employs 81 people in Paris, London, Zurich, New York and Hong Kong.
About two years ago, Landeau started transitioning to other management. This presented a double problem. First, he had to offer his employees continuity. So far, he has brought on board a chairman and a professional from Bank Julius Bär to share CIO responsibilities on the fund management side, and he is looking for a chief executive to run the firm.
Second, he had to monetise what he'd spent 19 years building. Landeau says his options were to list, sell or go into partnership with someone who shared his objectives. Finding the first two options unpalatable, he and his colleagues decided to do a leveraged buyout themselves in conjunction with the Sagard Private Equity Fund, which is controlled by the Desmarais family of Montreal. "We leveraged up the company, and 79 out of 81 of the employees took shares with warrants. I kept 36% of the company, which was a little bit more than half of what I had before." Sagard took a 44% stake in the group.
For the moment, Olympia is paying down the debt, says Landeau. "When the debt is gone, these types of companies become unbelievably profitable." And after that? "I presume we'll do another LBO, but we may sell, it's too early to say."
Click here to read our web exclusive: Fred Fruitman, managing director at family office Loeb Partners, provides an intriguing account of how his office set up its own hedge fund to cater to the Loeb family's alternative investment needs.
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