Family Offices and Unlimited Investment Opportunities - Managing Risk - Boodle Hatfield

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10 May 2021

Family Offices and Unlimited Investment Opportunities – Managing Risk

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2 min read

For Ultra High Net Worth Families, family offices are now commonplace. They bring focus to the control of wide ranging investment asset classes and mark them off from domestic assets such as houses, yachts and aircraft. Single family offices are unregulated, and there is no limit on the investment opportunities which can be considered, but does the collapse of Archegos, a single family office, highlight a problem which might be replicated across other family offices?

The banks are assessing how they underestimated the risk of financing Archegos, but for family offices the lessons start with the fact that its investments were apparently all managed in house and were effectively a single manager fund of (reputedly) $100bn gross assets. A proper supervisory board would surely have questioned that.

There was a lack of transparency at every level so that the lenders (prime brokers) seem not to have been aware of the total exposure.

The transactions were complex, with a significant use of total return swaps and contracts for differences.

There was excessive leverage, with insufficient cover when margin calls were made, triggering a sell off of outstanding positions and a collapse of the whole fund, with billions lost by the funding banks.

A properly run Family Office would of course have avoided these pitfalls by:

  • Being clear on an investment policy which had a proper mix of risk levels, ensuring that if the high risk investments fail, they would not bring down the whole fund
  • Considering the balance between in house and external management
  • Maintaining a strong supervisory Board which is not in thrall of managers who over-promise
  • Maintaining the involvement of "a trusted adviser", who can provide a dispassionate view, removed from the excitement of a seemingly successful but very high risk investment strategy

And of course some understanding, which appears to have been absent from Archegos, of the difference between investment and pure speculation.

Reassuringly, the lessons are not technical and a well considered family office structure remains the solution of choice for the management of financial assets.

“The Archegos event illustrates the limited visibility into hedge-fund exposures and serves as a reminder that available measures of hedge-fund leverage may not be capturing important risks,”

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