Hedge Funds’ Latest Defector: Family Offices

Family offices join other institutional investors in retreating from the much-maligned investment vehicle.

Add family offices to the list of investors backing away from hedge funds.

Much like endowments and foundations, family offices are scaling back their hedge fund allocations, with 34% planning decrease their commitments, according to a survey by Campden Wealth Research and UBS.

The survey, which included 242 family offices with an average of $759 million in assets, revealed concerns about poor performance and high fees similar to those shared by endowments and foundations in an NEPC poll last month.

“This year’s report shows a re-appraisal of hedge funds amongst the family office community,” said Stuart Rutherford, director of research at Campden Wealth. “There are also some doubts about the ability of hedge funds to generate alpha going forward, even with the benefit of volatility.”

But while endowments returned 2.4% in 2015, family offices earned just 0.3%—down from annual returns of 6.1% and 8.5% in 2014 and 2013.

“The endowment funds of top universities tend to be prepared to take greater risks than the average family office, and often have much lower allocations to cash and fixed income,” said Rutherford. “There is also more stability in their investment approach and management because they don’ t have to navigate changes to family control and investment objectives.”

Perhaps due to these lower returns, the survey found that family offices are shifting their investments to riskier growth assets. Globally, investors pursuing growth strategies grew from 29% to 36% this year, with nearly two-thirds of US-based investors adopting these approaches.

“In the search for yield, family offices are playing to their strengths by allocating longer term and accepting more illiquidity,” said Philip Higson, vice chairman of UBS’ global family office group. “This approach is successful when experienced in-house teams have sufficient bandwdith for conducting due diligence and managing existing private market investments.”

Private equity in particular has become a favorite of family office investors, who grew their allocations from 19.8% to 22.1% this year. Hedge fund commitments, by comparison, dropped from 9% of the average portfolio to 8.1% in the last 12 months.

“Most family offices can trace their roots back to the growth and success of a single business,” Higson said. “Strong performance from private equity over the last five years has only served to strengthen this natural affiliation.”

Related: Are E&F Investors Abandoning Hedge Funds?

| Amy.Whyte@strategic-i.com | 646-308-2775