Family offices and hedge funds are two types of wealth management tools for high-net-worth investors and families. These platforms go beyond traditional financial advisors and provide additional services and opportunities that generally aren’t available to the average investor. In this article, we’ll define what they are, the differences between them and how to choose between a family office and hedge fund for your investments.
Another option is to work with a financial advisor, many of whom specialize in high-net-worth clients.
What Is a Family Office?
A family office is a private wealth management advisory firm that serves ultra-high-net-worth individuals and families. These platforms enable families to have all of their personal information and investments under one roof. They offer a total-outsourced solution for all of your financial needs. Family office services include investing, insurance, budgeting, charitable giving, estate planning, tax services and more.
Family offices usually focus on a single family, but some operate as multi-family offices (MFOs), serving several clients. The cost of running a family office typically starts at $1 million and can run much higher, depending on the size of staff required. MFOs are more common than single family offices because they share costs among multiple families.
What Is a Hedge Fund?
A hedge fund is a pooled investment fund whose managers often use risky or complex investments to achieve outsized returns. Most hedge funds typically focus on a specific niche or geographic region, but many are free to invest in any opportunity. Additionally, some may use leverage in order to amplify returns.
Hedge funds, which are alternative investments, are actively managed and often choose illiquid investments. Unlike the stock market where you can trade quickly and easily, hedge funds require investors to keep their money invested for longer periods of time. Due to the nature of its assets, you must be an accredited investor to invest in a hedge fund.
Differences Between Family Offices and Hedge Funds
While there are many similarities between a family office and a hedge fund, there are several distinct differences that you must consider:
- Are services personalized? Family offices provide personalized services for your family (or a limited number of families with an MFO). A hedge fund specializes in specific niches and you’ll pick the firm based on how it fits within your portfolio. Hedge funds do not change their investment approach to your goals.
- What services do they offer? A hedge fund invests in undervalued assets that it thinks has huge upside potential. Hedge funds invest your money, but they do not provide any other services. Family offices provide complete financial planning that covers all aspects of your money from investing to budgeting to estate planning and more.
- How much does it cost? The annual expenses for a hedge fund revolve around investment performance and assets under management. Typically, you’ll pay a percentage of your assets each year and a portion of the investment gains. Common fees are “2 and 20,” which amounts to 2% of assets under management and 20% of annual returns. By comparison, family offices usually charge a flat fee that covers the cost of their services.
Family Offices vs. Hedge Funds: Which is Better?
When choosing between a family office vs hedge fund, it depends on what services you need. Many investors have their own team of advisors and want to add hedge fund investments to their overall portfolio. Hedge funds typically have numerous investors that make up the fund. In some cases, investors may have money with multiple hedge funds based on the niche that those platforms focus on.
For investors who want all of their financial services under one umbrella, a family office is a good option. The family office handles everything from investing strategy to tax and estate planning to budgeting for everyday expenses. Family offices focus on your family (or a limited number of families) and provide personalized services centered around your goals. Your family office advisor may use one or more hedge funds in your investment portfolio.
The Bottom Line
As your net worth continues to grow, you may compare investing with a family office vs hedge fund. While both of these investing tools cater to high net worth investors, they provide different functions. A family office offers comprehensive financial support, while a hedge fund is an investment product catering to a specific niche. In general, an investor may use one family office, yet may also invest in one or more hedge funds.
Tips for Investing Your Money
- When investing your money, you need to maintain a diversified portfolio. This is true whether you’re managing your own money or if you have a financial advisor. However, many investors are unsure of how to create a balanced portfolio. Our asset allocation calculator provides suggested portfolio allocations based on your risk tolerance, timeframe and investing goals.
- Deciding where to invest your money can be a challenge, even for those with a high net worth. Family offices and hedge funds are just one of the many investment choices available to you. A financial advisor can help you determine the right course of action based on your goals and budget. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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