Family offices and hedge funds have been significant in the history of asset management and related services. They are both characterized by high net-worth individuals or families to the extent that people confuse them for one another. Many differences between a family office and hedge funds are revealed through various factors.
As your assets and net worth heighten, you may require support from a family office or a hedge fund. While both firms offer excellent services to their clients, understanding these differences will help you identify which aligns with your financial goals. Even better, you can seek financial advisory services for more guidance.
This blog post will contrast the two so you can understand them better before embracing them for your hard-earned assets.
Definition and Types
The most prominent difference between a family office and hedge funds is seen in the definition and types. To begin with, family offices refer to private firms that manage the assets and lifestyle of high-net-worth families alongside other financial services. They exist in various types, mainly single-family offices (SFO), multi-family offices (MFO), embedded family offices (EFO), and outsourced family offices.
On the other side, hedge funds refer to a private investment firm that pools together assets of high-network individuals and investors for management and risk mitigation. Four primary types of hedge funds exist global macro, equity, relative value, and activist hedge funds. These definitions guide you to understand the best one for your financial goals between the two.
Regulations of Each
Another factor differentiating a family office from a hedge fund is the regulations each faces before establishment and during operations. Family offices aren’t necessarily regulated or compelled to enlist with the Securities and Exchange Commission. This is because they hardly solicit external investors but focus strictly on families.
Conversely, hedge funds face strict regulations during formation and operation, including proof of eligibility and registration with the Securities and Exchange Commission. The government enforces such regulations on hedge funds since they feature more than just family assets but a pool of investors.
Cost Involved in Each
The cost of services in family offices and hedge funds varies significantly. Since they offer more personalized services, family office services may be more expensive than those of hedge funds. Being a family-manager direct relationship, some family offices may occasionally enjoy compensations and bonuses from their clients.
On the contrary, the cost of a hedge fund’s services may be constant since they have an agreement between the firm and its clients. It also largely depends on the performance of one’s investment in the market and the quality of their assets. Hedge funds are cheaper than family offices since they’re a pool of several investors.
Investment Strategy
You can differentiate family offices from hedge funds by evaluating their investment strategies. The former uses a more holistic or conservative approach to its clients due to the high level of confidentiality involved. Therefore, they often concentrate on assets such as bonds and private corporations.
Not that hedge funds don’t exercise privacy on their client’s assets and investments, but their degree doesn’t meet that of the counterpart. Since they focus more on various investments and individuals, hedge funds tend to have a more aggressive approach to their customers. Ensure to choose the one that suits your desired level of privacy.
Type of Investors
Another aspect differentiating family offices from hedge funds is the type of investors involved. Family offices concentrate on high-net-worth families’ financial needs and investments, while hedge funds are for single or organizational investors.
Additionally, family offices focus on a few clients at a time that is connected by marriage or blood. Conversely, hedge fund clients don’t have to be related in any way, and their number is significantly higher than in family offices.
Type of Management
The type of management experienced in family offices and hedge funds differs. Family offices are often started and operated by a single person who is also the manager. They may, however, employ one or two assistants for general purposes but not to have direct access to family assets, investments, lifestyle, or financial secrets.
Conversely, a team of professionals begins and runs hedge funds due to the many clients involved. Nearly all professionals have direct access to the client’s investments and general financial issues. Additionally, professionals in hedge funds are well-trained to offer uniform services to investors.
Type of Goals Achieved
Family offices and hedge funds have different operational goals. The former is usually focused on fulfilling long-term goals for its clients. They could be lifestyle-based, financial, investment, or risk-based goals. Conversely, hedge funds focus more on meeting short-term goals since various clients have different needs.
Research shows family offices are slightly easy to start but complex to run and maintain. If you perform tremendously, your family client wouldn’t wish to lose you as their family office but seek to establish a long-term relationship. Conversely, hedge funds might be relatively effortless to manage since the pool of professionals share ideas and efforts on how to undertake several services.
