I am truly interested in hearing advise from professionals on what could be pros and cons for a family driven corporation to set up a hedge fund to segregate the speculative activity from the core business. This is a real business case, one of my corporate clients has seen the speculative financial activity (funds, securities & derivatives trading) within the corporate grow massively in the past few years and is looking at the advantages/disadvantages of setting up a separate entity initially funded by the family wealth. I am open to any suggestions on what are the possible structure types (e.i. hedge fund, spv, etc) and on what could be the pros and cons of separating this activity from the corporate. Thanks
May 19, 2014
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What is the relationship of the main operating business to the possible hedge fund (let's just call it that for now)? For example, is the parent involved in a decent amount of international trade where they started hedging currency risk internally and it was born of that, where there may be a relationship between the speculative trading activity and the operating business, or did the son of the founder/owner get a hard on for trading (or come from an investing background) and simply start trading speculative stuff on margin backed by the credit of the parent co, so now you have a local widget maker that's trading complex financial instruments that could blow up the operating business?
this is basically the case:
"What is the relationship of the main operating business to the possible hedge fund (let's just call it that for now)? For example, is the parent involved in a decent amount of international trade where they started hedging currency risk internally and it was born of that, where there may be a relationship between the speculative trading activity and the operating business"
However the speculative/wealth management aspect has grow a lot and it could be wise to have a dedicated arm and a team taking care of this, rather that outsourcing many management aspects to other financial institutions, e.i. mandates to banks
I'd spin it off if only to put a corporate firewall between the two to make sure if something bad happens in the trading business that the operating business won't feel repercussions. Set up a family office of sorts (not as comprehensive as a full FO though). It could be in the same physical office but staff it up separately, try to seperate the balance sheet so that if the trading business is using the parent to use leverage and the trading business won't bankrupt the operating business. Staff it with investment folks because there's a big difference in the skill sets of people and you don't want to mess up the operating business by taking resources away.
By mandates with banks, what do you mean? You still want a prime broker and you are going to run trades through them or another institution: setting those functions up will be overly expensive and unnecessary-even the biggest of funds use them.
Are you taking outside money or is it all family money? If you plan on taking other investors one day and want to raise money make sure you're keeping track of your results. A good way to start a hedge fund is to raise some friends and family money, trade it for a couple of years and build a track record. After there's a track record you can go out and raise investor capital. If that's the goal the best is to develop a trading strategy that you can put on paper that shows what you do so that you can put it in fund docs. There are a few companies out there that will help set it up and run the admin aspects of it so that it fits into the same box as everyone and makes it attractive to investors.
Thanks for your advise.
Segregating the wealth management from the core business can surely bring multiple advantages, not least the safeguard of the family wealth from corporate dynamics.
By mandates to bank I mean that currently fund selection is outsourced to banks, whilst having a dedicated desk would allow the fund selection/due diligence to be done in-house, this allowing for deeper understanding of what's in portfolio, better relationship with managers and reduce costs.
At inception the AuM of this new vehicle would be mainly family wealth, however the idea is to offer optionality to senior management too, and in the med/long term allow for investors to allocate capital (as in a traditional hedge fund), given this what would be the best kind of structure?
Also keep in mind that the capital will come from what now is defined as corporate liquidity/assets, hence if needed this will need to fly back to the corporate, as this is the core business. Obviously this is not going to happen often, however if there is a share scheme and the corporate is owner of shares in the fund, this should be pretty straight forward.
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