So what’s the biggest untold story about family offices? It’s about the emotional toll that their wealth takes on them. It’s uncomfortable to talk about being burdened by a wealth transfer or having to incorporate prenups into a discussion about a future marriage. Alec Foege gives us a view into what it’s like for a family to have these conversations and the impact it makes on them long term.
Hedge fund returns for 2023 might not be what you expected, reports Erin Arvedlund of our sibling publication Pensions & Investments. Only 11 funds managed to beat the S&P, which has many high-net-worth investors asking the question: Why invest? While some are more skittish than ever, others plan to hang on to see how they perform over a three-year run.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: Lonely at the top — the emotional struggles of wealthy families
By ALEC FOEGE
When the eldest of three sons in a wealthy family recently decided to marry someone who didn’t come from wealth, he knew he needed a prenup.
Sandi Bragar, who is chief client officer at the wealth management firm Aspiriant, didn’t disagree with the young man in his late 20s, whose family she has worked with for two decades. But before referring him to an attorney, she recommended that he and his fiancée meet with a family wealth dynamics coach.
“I suggested they do some work together so that they could both come to the table with their attorneys, when they got to the prenup time, and have reference and have a chance to think about their own personal wealth identities, what their personal values are, what their joint values are and what they want to bring to that table,” Bragar said.
The emotional toll of wealth is the untold story in many ultra-high-net-worth families. And until recently, many found talking about it extremely difficult.
“The most surprising thing to me is that people don’t talk about wealth within their family,” said Clay Cockrell, a licensed psychotherapist who works with ultra-high-net-worth individuals. “I can’t tell you how many times people have come to me and said: ‘We never really talked about money. I knew we had it, but we never talked about it.’ ”
OVERWHELMING BURDEN
While enormous wealth clearly has its benefits, its long-term impact on the mental health of ultra-high-net-worth families rarely gets discussed. Simply having a trusted adviser to confide in represents a huge benefit for people who sometimes have lingering negative feelings about their wealth, said Jonathan Foster, CEO of Angeles Wealth in Santa Monica, California.
“When we talk with some of these people, some remarkable things come up that the average person cannot fathom,” Foster said. “The first one that I see a lot is what I call wealth guilt: ‘Yeah, I just got hundreds of millions of dollars, and what did I do to deserve it? Look at the rest of the world. Why should I get this?’ ”
Some heirs may look back to where the wealth came from and feel ill at ease with its source, he said. “Very often it comes not only with guilt, but it augments the deep satisfaction with how their parents achieved that wealth,” Foster said. For example, they made it in the oil business, and you’re an environmentalist.
Others struggle with the isolation and differentness that exceptional wealth can create.
“I remember a client, when we started working together, she was telling me how uncomfortable it was to go to get her hair done because her hairstylist knew that she was very wealthy and would ask her to pay in advance because the stylist was having a hard time financially,” Bragar said.
Bragar advised her client to say her family had a policy of not paying for services before using them and then offer to refer more of her friends to the hairstylist.
“Turns out she had the same issue with her household staff, so it was a prevalent thing she was experiencing,” she said.
BREAKING FREE OF MONEY TRAP
Not surprisingly, some wealth advisers find themselves playing the role of therapists, helping guide their clients through emotional struggles that few others can sympathize with. A few even become therapists themselves.
“I’m a lawyer who can see angels” is how Patricia Woo, a partner at Squire Patton Boggs in Hong Kong, describes her dual role as both legal and spiritual counsel. As a trust and estate attorney, Woo has advised wealthy families on how to set up values-centered family offices. More recently, she acquired a degree in transpersonal psychology after realizing that some of her clients required mental health assistance in addition to financial advice.
“Three days ago, a client called in the morning,” Woo said. “She didn’t sound right.” This client had been issuing harshly contradictory requests to Woo for a while, but it took an in-person visit for Woo to figure out what was going on.
The client’s husband had been having multiple affairs, but she was reluctant to leave him due to their 30-year relationship. “To me, the priority was to be in touch with her as a person,” Woo said. “I told her it’s safe for you to be whoever you want to be right now, and it’s totally fine to not know what to feel.”
Woo’s client was angry, “but it’s normal for women to be told by the family that you shouldn’t express anger,” she said, “so they use sadness to cover anger.” With a box of tissues in hand, Woo was able to persuade her client to simplify her life and think more about the direction in which she herself wanted to go.
STRIVING FOR PURPOSE
Well-publicized research from the University of Nevada in 2020, known informally as the Mercedes study, found that drivers of more expensive “prestigious” cars had a “lower ability to interpret the thoughts and feelings of others along with feelings of entitlement and narcissism.”
This lack of empathy among the ultrawealthy can result from living in a bubble and only associating with similarly privileged people, Cockrell said.
“If a person is feeling isolated, I think that it’s important to diversify your social contacts,” he said. “Don’t just hang around with other wealthy people. Get to know everyone.”
Furthermore, Cockrell said, as wealth inequality has grown in society, wealthy people are as likely to attract anger as adoration. While the temptation is to keep one’s privilege a secret, he suggests that good mental health for wealthy individuals involves accepting their position and owning it: “ ‘This is who I am. This is what I have.’ ”
Foster indeed views such self-reckonings as a golden opportunity. “Once you are so blessed that you don’t have to worry about what the rest of the world worries about, you can focus on other responsibilities,” he said. “What’s your legacy? How do you want to behave? How do you want your money to behave for you when you’re alive and when you’re dead? What do you want it to do for your descendants? If you break that down for people, it’s kind of a cool adventure.”
Reports on hedge fund returns in 2023: The highs are high, the lows ... low
By ERIN ARVEDLUND
Hedge fund returns for 2023 have begun rolling in, and the performance ranges from exceptional to terrible.
The stock market in 2023 returned 26.3% and 17.4% for the S&P 500 and Russell 2500, respectively.
Hedge funds rode the momentum, with Goldman Sachs Group reporting that hedge fund "crowding" — or ownership by hedge funds of the same stocks — hit a new high in 2023, driven by bets on the "Magnificent Seven" technology stocks.
The Magnificent Seven refers to Apple, Microsoft, Alphabet (Google), Nvidia, Amazon, Meta Platforms and Tesla. As a group, the seven companies returned 107% in 2023.
"In some respects, the crowding is understandable," said Curtis Jensen, portfolio manager at JEN Capital Partners, a New York value investment manager with $23 million in assets.
"Nevertheless, the herding of $2.5 trillion of hedge fund assets into a small group of richly valued, perhaps grossly overvalued, momentum stocks like the Magnificent Seven strikes me as perfectly antithetical to contrarian, risk-averse tenets."
And yet, only 11 hedge fund firms beat the S&P, "which begs the question, why invest? Hedge funds should only be able to charge the enormous fees they do if they beat the market," said Laura Goldman, a Miami-based adviser to ultra-high-net-worth families. "Pershing Square barely beat the S&P. [Pershing founder and CEO] Bill Ackman needs to get back to his day job," she said. Pershing Square Capital Management returned 26.7% in 2023.
However, Michael Weisz, founder and CEO of YieldStreet, which offers alternatives to family offices and institutional investors, said that on a three-year performance basis, "most hedge funds have outperformed the S&P, so a one-year comparison isn't quite fair." For example, since its inception in 1990, Citadel’s flagship fund posted 19.6% annualized returns, outpacing the S&P annualized return of 10.7%.
Multistrategy funds ended 2023 in the middle of the pack, with some of the largest firms posting midteen double-digit returns.
Among the multistrategy hedge funds that have reported so far are Ken Griffin's Citadel Wellington, up 15.3% for 2023; Och-Ziff Master (Sculptor), 12.9%; Sculptor ultimately was sold to Rithm in November 2023.
Steve Cohen's Point72 Asset Management gained 10.6%; D.E. Shaw Composite returned 9.6%; Winton Multi-Strategy gained 5.6%; Schonfeld Fundamental Equity, 4.6%; and Schonfeld Strategic Partners, 3.1%.
ALLOCATORS SATURATED
Returns were all over the spectrum. One hedge fund posting big losses was Haidar Capital Management, which tumbled 43.5% in 2023. Bridgewater Associates' Pure Alpha II fund slumped 7.6%.
On the other end of the returns, SoMa Partners rose 62.1%, Whale Rock Long Only returned 59.3% and emerging-markets-focused Discovery Capital Management — also known as a Tiger cub — gained 48%. Chase Colman's Tiger Global Long Only gained 20.4% last year.
Macro funds such as the Brevan Howard Master Fund lost 2.1% in 2023, while Rokos Capital Management gained 8.8%. Among the top performers in macro were Alphadyne Global Rates, and Tekmerion Capital, up 17.1% and 9.8%, respectively. Graham Capital Management's Proprietary Matrix fund returned 2.9%.
Some allocators appear to have had their fill of hedge funds, Agecroft Partners' founder and CEO Don Steinbrugge said in a recent research note on 2024 industry trends.
"Pension funds, endowment funds, foundations, sovereign wealth funds, OCIOs, private banks and advisers firms seem to have reached a saturation point in fully allocating a percent of assets to hedge funds," he wrote. Consequently, the industry's future growth will likely slow, he said.
In addition, pension funds are reducing the average size of managers to which they allocate.
"As pensions struggle to enhance returns to meet their actuarial assumptions, we will also see an increase in the speed of the evolution of pension funds' hedge fund investment process," Steinbrugge said.
Many have added an emerging-manager component to portfolios to take advantage of capacity-constrained strategies, capture higher returns or benefit from a larger fee break, he said.
Bloomberg contributed performance data to this story.
LOOSE CHANGE
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