how the 0.001% invest

Global finance is changing as billionaires are getting richer and cutting out the middlemen by creating their own “family offices,” individual investment firms that roam global markets in search of opportunities. Largely unnoticed, family offices have become a force to be reckoned with in investing up to $4. Trun of assets – more than hedge funds and equal to 6% of the value of the world’s stock markets. As they grow even larger in an age of populism, family offices face uncomfortable questions about how they concentrate power and feed inequality.

The concept is hardly new; John D. Rockefeller established his family office in 1882. But this century has seen an explosion in numbers. Somewhere between 5,000 and 10,000 are located in the US and Europe and in Asian centers such as Singapore and Hong Kong. Although their main function is to manage financial assets, the largest offices, some with hundreds of employees, perform all kinds of other work, from tax and legal work to acting as high-powered butlers who book jets. do and pamper pets.

The cost of bringing such expertise to mansions means they generally only make sense for those worth more than $100m, the top 0.001% of the global agglomeration. Asian tycoons like Alibaba’s Jack Ma have made their own fiefdoms. The largest Western family offices, such as the one founded by George Soros, an investor and philanthropist, oversee tens of billions and are as powerful as Wall Street firms, which compete with banks and private-equity groups to buy entire companies. We do.

Every investment boom reflects the society that spawned it. The humble mutual fund came into being in the 1970s after two decades of middle-class prosperity in America. The rise of family offices reflects growing inequality. The share of world wealth owned by the top 0.01% has increased from 3% to 8% since 1980. As the founders of family firms receive dividends or the proceeds of initial public offerings, they typically redistribute the cash. But since the financial crisis, there has been a loss of confidence in external money managers. Wealthy customers have looked closely at the high fees and questionable incentives of private banks and are hesitant.

As our briefing points out, these trends are unlikely to abate. The number of billionaires is still on the rise—199 newbies made the grade last year. Older entrepreneurs in the emerging world who built firms in the post-1990 boom years are preparing to cash out, while young tech entrepreneurs in the US and China may soon float their companies, leaving room for reinvestment. A new wave of cash may be released. Therefore, the burden of family offices in the financial system is likely to increase further. As it happens, the objections to them will grow exponentially. The most obvious of these is the least reassuring – that family offices have created inequality. They are a consequence, not the cause. Still, there are concerns — and one in particular that’s worth worrying about.

The first is that family offices can threaten the stability of the financial system. Combinations of the very rich, opacity and markets can be explosive. LTCM, the $100bn hedge fund backed by the super-rich, blew up in 1998, nearly bringing Wall Street down. Millions of wealthy people fell for a Ponzi scheme run by Bernie Madoff that shut down in 2008. Yet, as things stand, family offices don’t appear to be waiting for the next disaster. They have debt equivalent to 17% of their assets, making them one of the least leveraged participants in the global markets. On balance, they may even be a stabilizing effect. Their funds are typically deployed for decades, making them less vulnerable to panics than banks and many hedge funds.

The second concern is that family offices could increase the power of the wealthy over the economy. It is possible: If Bill Gates invests exclusively in Turkey, he will own 65% of its market share. But the objective is usually to diversify risk, not concentrate power, by taking capital from the original family business and putting it into a more widely spread portfolio. The family-office industry is less focused than mainstream asset management, which is dominated by a few firms such as BlackRock. Compared to most fund managers, family offices have welcome habits, including longer time horizons and an appetite for startups.

It’s the third danger that bites the most: that family offices may have privileged access to information, deals and tax planning, allowing them to outperform ordinary investors. So far there is little evidence of this. According to Campden Wealth, a research firm that closely tracks world stock markets, the average family office returned 16% in 2017 and 7% in 2016. Nonetheless, the tycoons are well connected. Family offices are becoming more complex—one-third have at least two branches—making tax wheezing easier. Hungry brokers and banks are rolling out the red carpet and striking deals with unlisted firms that are not available to common investors. If all of this leads to a deep, unfair advantage, the effects, when compounded over decades, will make wealth inequality catastrophically worse.

rich people search for do it yourself

The answer is vigilance and light. Most regulators, treasuries and tax authorities are beginners in dealing with family offices, but they need to ensure that rules on insider trading, equal service of customers by dealers and equality of tax treatment are followed. And they should encourage family offices with more than $10bn in assets to publish details of their workings. In a world where privilege is suspected, large family offices have an interest in increasing transparency. In return, they should be given the freedom to work without interference. He may also have something to teach the hordes of floundering asset managers serving ordinary investors, many of whom can watch their monthly fees and wish they too could ditch the middleman.