by Agreus Co-Founder and President of Agreus USA, Tayyab Mohamed
Archegos is not the first big scandal to hit the Family Office space and it certainly will not be the last.
What it is also not, is an inherent Family Office problem and certainly not one the entire community should be held accountable for.
There is talk of a lobby to increase regulation and disclosure of Family Offices but while I can sympathise with banks and institutions for not wanting to make the same mistake twice, it is vital that as a community we stress its exceptionality.
The Bill Hwang story is not a common one. He is very much what I would call an aggressive gen-one and Archegos is essentially a Hedge fund that transitioned into a Family Office. Hwang is a wealth creator who started with nothing – a protégé as some are calling, a tiger cub by others.
When you are the wealth creator you have a larger risk appetite, you have nothing to lose but everything to gain but while the first generation are often prone to more aggressive risk taking, they are certainly not on the level of Archegos which is once again a rarity. It is also a far cry from the second, third and fourth generations we see today who are far more risk averse.
The current generation of leaders are very careful in not only preserving their wealth but ensuring it makes an impact inside and outside of their family. Alongside the risk-prone first generation and cautious second generation sits the completely risk averse philanthropic foundations. A growing subsection of Family Offices which should let regulators rest assured the Archegos strategy is not a common one.
We have worked with some Family Offices that have very high risk appetites but even still, the Hwang strategy is exceptionally unique. Hwang leveraged five-fold in a derivative that was concentrated on very few securities. Had it not gone the way it did, he would have been a multi-billionaire. We haven’t seen anything like it in over a decade of working exclusively with Family Offices.
The question that should be asked is, why wasn’t Bill Hwang’s chequered past for insider trading registered as a red flag? Was it adequately taken into consideration by some of the biggest names on the street who have now suffered a huge loss?
When recruiting into Family Offices, a thorough background check is performed not only to ensure that resumes match real-life but to ensure these individuals can be trusted to uphold Family values, be loyal, trustworthy and completely aligned with their objectives. Something like this isn’t easily missed and it begs a question as to how he was able to take such a big position in such concentrated number of securities.
One man’s loss seems to be no-ones gain in this case with banks suffering a massive $20BN blow and Family Offices at risk of losing the very thing they value the most – discretion and privacy.
Regulation and disclosure would be terrible for Family Offices. Their very existence relies upon their confidentiality and not only would this go against their very DNA but it would unpick the extraordinary effort that went into passing the Dodd-Frank Act some 10 years ago.
But perhaps the biggest loss of all would be how it could deter UHNWI’s and Families from establishing Family Offices. The most influential and fluid investors today and the very entities that form the backbone of investments in technology, pharmaceuticals, making a social impact and delivering change in the world we live in. The very entities that are reinjecting life back into the global economy by supporting the SMEs.
While the prospect of regulation and excessive disclosure frightens me, I also think it is unlikely. Not only because Family Offices are very hard to define and distinguish but because Family Offices will fight this to the very end. Equally, banks and other players in the sell side will also serve to lose from a reduction in numbers of Family Offices.
Due diligence and KYC will however become bigger than it is currently. While this is not an inherent problem for Family Offices, it will likely happen again within those who tarnish the title.
I do not believe the talk of regulation and more disclosure will spell an end of a golden era, but it will certainly slow down a thriving investor class because non-disclosure and privacy is worth a price. A price only paid through the concept of a Single Family Office.