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$ 6 trillion world of Family Office fights post-Archegos crackdown
(Bloomberg) – Archegos’ implosion poses thousands of secret family offices the biggest privacy challenge in a decade. They won’t give up without a fight.Some lawmakers, regulators and consumer advocates are pushing to expose the inner workings of family offices, which are tightly managed and lightly regulated but manage around $ 6 trillion for the world’s ultra-rich. . the changes sought by reform advocates would require U.S. family offices to register as investment advisers and publicly report their holdings on a quarterly basis, as most other types of investment firms must. it could also reveal proprietary information to competitors. Those pushing for more regulation are optimistic that the new chairman of the Securities and Exchange Commission, Gary Gensler, who has a solid reputation on Wall Street, will see it their way. “The rationale for exempting family offices is clearly untenable now, and we believe the SEC will change that quickly,” said Dennis Kelleher, CEO of advocacy group Better Markets. what all investment firms, including family offices, must disclose about their holdings, Bloomberg reported. The new disclosures could include the positions of companies on derivatives and the stocks they sell. They say they are preparing for their biggest lobbying effort since they managed to avoid being included in tough new regulations after the 2008 financial crisis. Their strategy: insist that the family office setup d’Archegos was unrelated to his implosion. “What Archegos did and the fact that they got into trouble had nothing to do with the structure of the family office,” said Brian Reardon, lobbyist for the Private Investor. The merger of Archegos Capital Management LP at the end of March, led by former hedge fund manager Bill Hwang, sparked the lobbying skirmish. After being shut out of the hedge fund industry for insider trading, Hwang opened a family office in 2013 and ultimately converted $ 200 million into around $ 20 billion in assets, using a high portfolio. leverage concentrated in a handful of stocks. The explosion that followed revealed that neither regulators nor brokers had any idea of the magnitude of Archegos’ positions. “The losses are serious,” said Andrew Park, senior policy analyst for Americans for Financial Reform. “But what’s most amazing is that these losses all came from a company that no one knew about until a few weeks ago. His group has asked the SEC to examine whether the family office registration exemption creates “regulatory blind spots.” Major brokerage banks that had to liquidate Archegos’ positions, including Morgan Stanley, Nomura Holdings Inc. and Credit Suisse Group AG, have lost billions of dollars, leading some bank executives to also call for closer scrutiny . “Frankly, the transparency and lack of disclosure regarding these institutions is just different from that of hedge fund institutions. And that’s something I’m sure the SEC will look into, ”Morgan Stanley CEO James Gorman said on an April 16 earnings call. “Better information is always helpful in spotting potential problems.” Reardon, of the Private Investor Coalition, said his group plans to speak to the SEC, the Commodity Futures Trading Commission and lawmakers to explain why some of the proponents of the disclosure have called for Angelo Robles, founder of the Family Office Association. , is also preparing to take action. He said he plans to contact U.S. law firms and senators if regulators take an aggressive stance on family offices. “The fallout will likely be more regulation on swaps,” said Robles, whose Greenwich, Connecticut-based group has more than 200 members worldwide, referring to the type of Archegos derivative often used. the shock that a little-known family office could have such an effect serves as a rallying cry for supporters of Wall Street reform. Better Markets’ Kelleher said he had already argued his case with SEC staff, arguing in part from more public disclosure from the family office the sizes and positions could help prevent them from becoming a risk to the financial system. Lawmakers have also shown interest. Ohio Democrat Sherrod Brown, who heads the Senate Banking Committee, has asked Archegos brokers to disclose information about their dealings with family offices. Family offices serving one family and without outside clients generally do not need to register with the SEC as investment advisers. The rationale for the exemption is that they only serve a single high net worth client who does not need the protections afforded to investors in other funds.In addition, offices with less than $ 100 million in assets or who manage funds for one person may avoid disclosing regularly Offices that serve more family members must file their holdings with the SEC, but can request, and often receive, an exemption allowing them to keep the filing confidential . funds, typically only include direct ownership of shares and not positions in derivatives, like the total return swaps that led to the downfall of Archegos. The big banks traded the equity swaps for Archegos for a fee. These swaps allowed the company to spend relatively small amounts – it basically used borrowed money to build a huge portfolio – while keeping its individual stock ownership hidden. investment firms, including family offices, disclose derivatives. and short positions, which would not necessarily infringe the privacy of family offices if they were still able to confidentially file assets with the SEC. The lack of disclosure has allowed some family offices to adopt such complex strategies without attracting attention. Complying with fewer regulations, meanwhile, has allowed a number of hedge fund managers to convert their businesses into family offices. BlueCrest Capital Management, for example, returned money to investors in 2016 to focus on on the wealth management of its billionaire co-founder Michael. Platt, his associates and employees. John Paulson said last year that he was converting his hedge fund Paulson & Co. into a family office, following a similar move by Leon Cooperman’s Omega advisers. Family offices have proliferated this century, in part to cause of the boom of tech billionaires. More than 10,000 family offices around the world manage the wealth of a single family, at least half of which began this century, according to EY. A 2019 estimate by researcher Campden Wealth valued family office assets at nearly $ 6 trillion. globally, more than the entire hedge fund. industry. Because most families keep the extent of their wealth closely and very little public records are available to track their assets, the exact figure could be higher or lower. It is rare for family offices to take as much risk as they do. Archegos. But hedge funds that convert to family offices are more likely to stick with their trading strategies, which often use leveraged bets that can have a broader market effect. Some family offices have also recently launched so-called firms in white – front companies whose goal is Part of the Private Investor Coalition’s plan is to tell regulators they already have the tools they need to identify threats to the financial system, Reardon said . The SEC is implementing a long-delayed rule that would require all funds, including family offices, to privately disclose some of their derivative positions to the agency. In theory, that would have allowed the SEC to see what Archegos was doing, but requiring Archegos to register as an investment adviser would not have prevented the explosion, said Reardon, whose coalition has stood up. formed in 2009 to provide offices. If regulators crack down on family offices in the United States, some might simply decide to leave the country. “In reality, the typical single family office is a small team of highly mobile individuals,” said Keith Johnston, CEO of SFO Alliance, a London-based investment club for single-family offices. “There is a risk that if they consider themselves too regulated, they will simply move staff or headquarters to jurisdictions where they are not located.” For more articles like this, please visit us at bloomberg.com’s business news source. © 2021 Bloomberg LP