I've worked for a family office in Hong Kong. What was really telling for me was how the rate of return KPI was measured. We were not benchmarked against the S&P 500, or any index. We were measured directly against the fund of another frenemy family. So long as the fund outperformed the other family, all was good. It's crazy because you could be underperforming treasury bonds, and still be good because the other office was worse.
I guess when you that much money, more money means less than vanity and bragging rights.
I've seen the portfolio's of dozens of family offices (I worked at a portfolio analytics company so I had free reign to snoop around), and none of the offices seemed competent. The returns were terrible and the portfolio construction laughable.
Instead of striving for out performance, the funds just catered to the whims and idiosyncrasies of the family. Also, many of these funds were too small to make sense, AUMs from like 150MM-500MM. They would have be much better off just investing in a hedge fund, but the family's ego didn't allow them. I think the point was to show off more than anything else.
One of the exceptions was Sergey Brin's family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
A friend of mine who manages ultra wealth people said most people who turn up don't say "How much can you make me" but say "Can you make sure I'm never poor".
It's often about preservation of wealth more than gains for these people.
That said I've discussed some returns they make and it's incredible. I don't want to say what I recall, as it was a couple years back and it sounds like an exaggeration. They said this is partly because they get access to deals that don't hit the wider market and you need serious cash to get in the room to have that chat. And I guess these manager have a bunch of the right people attached to them so it makes an easy stop.
>They said this is partly because they get access to deals that don't hit the wider market and you need serious cash to get in the room to have that chat.
This is something I hear a lot and I just don't get. Are the people on the other side of those deals just...not greedy? After all, you are implying that the deal has better expected returns than what people are buying on margin in public markets, so why doesn't the person on the other side of the deal take a little more for themselves by selling there instead (at a slightly more favorable interest rate)?
Is it because the rich investors are needed to bring some level of expertise or connections to the investment to make it work? If that's the case, and it seems likely, I would not say they are getting "access to better deals" per se. More like they are getting a normal rate of return and they have a valuable asset that they are renting out as well (their expertise or connections), and it all gets rolled into one number. But complaining about the rich having valuable assets is different from complaining about them having access to better investment opportunities.
Example: if I'm an entrepreneur and I see an opportunity, and I have a friend with the resources to support me and who also thinks this is a good idea, then I'm not going to go out and raise funding from random strangers.
You'd be surprised how many deals like that are out there. Many entrepreneurs do business with a few solid partners during their lifetime.
Aside from that, there are other reasons:
1. You don't want to invest everything in the public markets, i.e. acquiring an interesting existing business and growing from there could be a good idea.
2. Some of these businesses might be less prone to losses during a recession or stock market correction, so they might serve as a buffer for cashflow and income.
3. These deals might have higher upside, because of information asymmetry or something that isn't blatantly obvious to other people. Alternatively, you might have access to different channels that could easily grow the business.
The sole reason that the path to public markets is a long and compliance-ridden one is enough to seek private investment. It's much harder to raise money in public markets than private ones.
But far cheaper to raise money in public markets than private.
Once you’re big enough, IPOing makes sense, unless you just want to maintain control or those pesky compliance requirements will reveal some harsh secrets.
Think of it like a venture capital deal. If you wanted to invest in Uber in their seed round, you couldn't get in the deal unless you had a fund set up or you were an accredited investor and had a connection to the founders.
This type of deal can get you huge returns but is also very risky.
Is it because the rich investors are needed to bring some level of expertise or connections to the investment to make it work?
My first thought was regulation. See: accredited investor. One can sell to accredited investors, and caveat emptor, or get buried in a whole new ass-load of paperwork and butt-microscopes selling to retail.
My second thought was scaling, or selling in volume. Why do companies sell wholesale? Because they don't want to deal with nickel-and-dime buyers, there's a whole new set of infrastructure and process needed for that. Take a little less profit to sell one big block rather than doling it out to retail investors.
They’re called “bought deals”. An investment bank has a public-traded equity desk that will buy, up-front, $x billion of your stock at $Y. Then they’ll email blast/call their retail investors to buy it up over the next few weeks.
The banks take the risk of not filling the order with retail buyers, which happens occasionally.
Deals outside the wider market likely carry more risk, but when they work out, more reward. The other side of the deal may have time pressure and also doesn't have so many investors to shop their deal to, so they may not be able to be that agressive either.
you're missing a couple of other factors, one is timing and being bale to move quickly, a perfect example is the warren buffet's investment in GS during the financial crisis [1]. GS didn't show that deal to the world - it went to someone that they knew could act quickly (one decision maker) and stroke a big check....
As the articles alluded to, buffets investments during the crisis (I think he also took a big bet on BoA), were not a result of him being able to move quickly. They didn't need the money as badly as they needed the good PR. If the headlines read that GS had raised some capital from a bunch of "no name" investors, that wouldn't have had nearly the impact of their press release that THE Warren Buffet just invested billions in GS - so obviously he thinks we are a good bet.
Now of course, buffet also needed timing and the ability to act fast, but lots of people had money to invest then.
I imagine there can be some deals that people don't really want to make public even if they aren't strictly speaking illegal.
One such a deal that surfaced somewhat recently was that cum-ex trading. If you put that in the public market, you would essentially be killing the goose that's laying golden eggs since there would be outcry to make it illegal. If instead you just offered it to select few (people with enough capital & no moral qualms about using it), you could keep it under the wraps for longer time and get better long term return.
I deal with multiple folks who have them. This is the real goal, though tongue-in-cheek. Ultimately they want monies to increase as the family logically increases in size.
>One of the exceptions was [Person]'s family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
I'm not sure what type of professional you are, but you may be in breach of your responsibilities by disclosing the specifics listed above.
I know this message might seem silly, but I'd hate if you got in trouble for complimenting the guy's affairs.
Edit: I've editted out the person in question's name in case you do the same.
Well, not so random, seems like it would be pretty easy when you give narrow personally identifiable snippets like "I worked at a portfolio analytics company so I had free reign to snoop around"...
Who knows other similar comments they've said in other threads on HN?
Was thinking the same thing, but I'm sure they still want to have a portion of their portfolio in high risk high reward investments. I also wonder if they can get better deals (Warren Buffet style) by taking large positions direct vs. buying indexes through a broker.
1. Companies don't die, so are not liable to inheritance tax.
2. (Holding) companies often don't pay capital gains taxes, so money can compound tax free. You only pay tax at the end, when you take it out of the company.
3. If they're using (some) debt to invest, using a company shields them from liability and bankruptcy (Google Einar Aas, he bankrupted himself in personal name because he traded using a personal account with leverage)
Depends on risk tolerance and how flashy they want to be.
Donald Trump, if his public finances are to be believed, would have roughly the same net worth had he just invested the money his dad gave him in mutual funds. Instead he managed to create a series of failing companies and questionable ties... but managed to live the high life and stamp his name on bloody everything.
To offer a better and less political answer: the reason that an UHNWI doesn't park their entire net worth in an index fund is because there is some probability, however minute, that the markets will collapse and never recover.
Additionally, we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities. For an UHNWI, this is likely enough to beat the market, especially if a high percentage of investors are passive, leaving more opportunities for corrections open.
As another commenter said, the goal is usually to avoid becoming poor first and foremost, rather than becoming richer.
> To offer a better and less political answer: the reason that an UHNWI doesn't park their entire net worth in an index fund is because there is some probability, however minute, that the markets will collapse and never recover.
Sure, but it seems like the solution to that isn't "new and innovative private investments", it's "invest more money in treasury bonds from stable first-world governments and maybe precious metals".
>> we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities
Is this also true at the level of the small investor ?
Say I'm willing to spend a few hours a day learning and researching about stocks. Does this mean that over time, I'll be able to significantly beat the index funds ?
Or is it, more likely, a fool's errand, because that as a small investor, I don't really have enough bandwidth and money to significantly diversify ?
It's a fool's errand. There are people who spend 80 hours a week doing this kind of analysis at firms that pay millions of dollars a year for the most sophisticated data and analysis, and those folks still don't beat the market more than randomly. These firms pay hundreds of millions of dollars to improve their trading systems' latency by just a few milliseconds.
You don't have a chance unless you are doing the same amount of work with more sophisticated tools, with the same trading tools.
You might win based purely on chance, but you are extremely unlikely to.
Some of the high frequency traders can rake it in. But they are using teams of highly paid analysts to look for opportunities and those opportunities don't last long before they have to move on to the next thing. And I would assume it's getting harder and harder for them as time goes on and more enter that market.
> Donald Trump, if his public finances are to be believed, would have roughly the same net worth had he just invested the money his dad gave him in mutual funds.
There was a factoid going around years ago that said Donald Trump's net worth was equal to the value of his inheritance if it had been invested in an index fund.
But note that under that hypothetical, he never would have spent any of it. Do you think the historical Donald Trump ever made any splashy purchases? Where did that money come from?
Having a high net worth while living the high life involves a lot more money than having a high net worth while living an ascetic life, and implies that his returns were a lot more than the index fund experienced.
Trump's net worth is actually measurably lower than what his inheritance would have been worth if it were invested in index funds.
Also, while some of Trump's lavish expenses are pretty much just lavish expenses (business jets and the like), some of his superficially ridiculous personal expenses, like gold-plating half of his entire penthouse apartment in Trump Tower[1], don't necessarily hurt his net worth that much because he could always sell the tower with the tacky gold-plated penthouse to someone else who could extract some value by removing the tacky gold plating and having two valuable assets left over: (a) a penthouse apartment in a Manhattan high-rise and (b) gold.
Most of Trump's losses came from a variety of failed business ventures, which isn't necessarily a huge criticism. Some people just like doing a bunch of business ventures and they don't all have to succeed to be a net positive. It's just that if Donald Trump spent the same lavish amounts of money and invested less money in his own ventures and more money in index funds, he would be richer today.
Of course, in this hypothetical scenario, would he become a cartoonish real-life personification of American capitalism, host a reality TV show, get a lot of Twitter followers, and develop the dedicated fanbase necessary to eventually be elected President? Probably not.
[1] I'm not entirely making this up, though my only source is a foggy memory of the first season of The Apprentice, when Donald Trump invites the guests to tour his penthouse apartment.
Of all the very rightful criticisms leveled at Trump, ridiculing him for not putting his money into index funds is one of the worse ones. Building businesses is its own reward. People don't get it that just like painting or writing, people can get satisfaction from seeing a venture to completion or inking a good deal
And if he enjoys building businesses enough to make up for the massive opportunity costs for investing his money in Trump Steaks instead of index funds, that’s entirely up to him, but let’s not laud him as a business genius for it.
>that said Donald Trump's net worth was equal to the value of his inheritance if it had been invested in an index fund.
Incorrect, it would have been worth substantially more, at about 13 billion (his current wealth is around 3-4 billion). So he still would have been able to spend billions and be further ahead than he is today.
First of all you're wrong, I did read the article. Secondly, the author directly addresses that point. He was leveraged when buying real estate too, so why not assume he would be leveraged up in the stock market? It's not an uncommon practice at all, and the comparison wouldn't make sense without factoring in loans.
Frankly I would have done the same, I think running a bunch of different businesses would be more stimulating than maximizing wealth through stocks. But objectively he's paid a financial price for that.
Which is why it's so interesting that the NY Times article ( that exposed his success as a product of a huge inheritance) didn't get much traction among any of his followers.
I remember listening to an interview with the bylines. Everyone in that interview sounded so sure it would dent Trump’s reputation. Man, I’m really not a fan of the guy, but his opponents have absolutely no idea what they’re up against, and haven’t for a long time.
Trump is the harbinger of a return to patrimonialism. Family offices, a return to patrimonialism. You get a bunch of people who never really understood civics or finance and you try to govern them technocratically, and you’re going to struggle. But everyone in this demographic understands families. They see this dude being passed down wealth, and ‘making something’ of it, and setting his kids up. People understand that, especially the type of person who doesn’t necessarily understand how the neoliberal world works, in ways that are both in their favor and against it.
Family offices are another data point in this trend towards capital accumulation, stark income inequality, and a retreat from public exposure.
Except the premise is in accurate. He wasn't left with $1m. He was left with hundreds of millions in cash and cashflowing assets. Had he invested $250mm in the markets back then, he would be much ticket today.
Except it was likely property, and he couldn't liquidate those properties without incurring capital gains taxes (set at 49% in 1970)?
I don't know, perhaps you couldn't very easily leverage properties back then for cash (i.e. once they had been paid off), or interest rates were very high (a quick google teaches us that in 1970, the interest rate was 8.5%)?
It actually wasn't property, a large portion was cash in terms of salary collected as an infant or various gifts. There was a report by NYT not too long ago.
agreed -- not likely, and it assumes those gains every year which is not reasonable. More, it ignores one very important fact, the destructiveness of losses. A one-year loss can be devastating to a fund. which is why many favor "safety" over "gains".
It's not uncommon for aggressive growth funds to take a 20% tumble in a year. Downside is much, much more destructive than many understand especially when one must also account for fund management fees (typically .7%) which are collected whether the fund gains or loses!
But the simple fact is that a 50% loss requires a 100% gain just to get back to even, which is still a loss once inflation and operating costs are factored in.
Here's a simple question that most people fail:
Q: A mutual fund loses 50% in a year. In order to break even the next year, your fund must earn ?
1) inflation
2) 50% + inflation
3) 50% + your income tax rate
4) 100% + inflation
5) 100% + inflation + operating costs + 'it depends'
The correct answer is 5. The correct answer is nearly 106%- One must make up for actual loss (100%) PLUS operating expenses for both years (usually 0.7% per year: 1.5%), plus inflation for both years (2%/annum: 4%). Of course there are tax implication for gains/losses taken outside of a qualified retirement plan (401k,403b,etc.) and sheltering losses can complicate substantially, but hopefully this illustrates a point about the impact of losses.
You're not considering a) leveraged stock purchases (using debt, like he did with real estate) and b) that his inheritance was significantly more than 1MM. Check out this analysis from forbes:
$1M as "small loan" in 1968, then becoming president of his fathers real estate company 1974 (shares divided among Donald Trump and his 4 siblings) estimated at $200M ($40M for him but not liquidated at that point), and then inheritance from his father in 1999 estimated between $20M and $300M.
Slightly more than the infamous small $1M loan then.
If you were smart you’d delete this comment and possibly your account. It’s not worth disclosing personal information about a client you worked on, anywhere online. Seems like an unnecessary risk, regardless of how trivial you think it was.
There was a line from the first season of the TV show Silicon Valley: "Are you kidding? [Rich VC] would spend a million dollars just to mildly annoy [competing VC]!"
How do you cope with that? That people whose financial decisions involve 100s-of-poor-people-lifetimes levels of money are still so irrational in their motivation?
A close friend of mine works for the Rothschild family office. He described to me how Lord R and his son don't see eye-to-eye on the family money. A lot of time has apparently been spent on reports making Lord R look better than his son at investing.
Right up until 1999 this was a meaningful position with actual political power. Even now, non-hereditary lords comprise the upper chamber of parliament.
Being a Lord in the UK is more or less equivalent to being a US senator.
My preferred personal pronoun is "lord". Pretty soon it will be required that people call me "lord" or I will get offended and take them to whatever human rights commision is appropriate.
I guess when you that much money, more money means less than vanity and bragging rights.