I've worked for a family office in Hong Kong. What was really telling for me was how the rate of return KPI was measured. We were not benchmarked against the S&P 500, or any index. We were measured directly against the fund of another frenemy family. So long as the fund outperformed the other family, all was good. It's crazy because you could be underperforming treasury bonds, and still be good because the other office was worse.
I guess when you that much money, more money means less than vanity and bragging rights.
I've seen the portfolio's of dozens of family offices (I worked at a portfolio analytics company so I had free reign to snoop around), and none of the offices seemed competent. The returns were terrible and the portfolio construction laughable.
Instead of striving for out performance, the funds just catered to the whims and idiosyncrasies of the family. Also, many of these funds were too small to make sense, AUMs from like 150MM-500MM. They would have be much better off just investing in a hedge fund, but the family's ego didn't allow them. I think the point was to show off more than anything else.
One of the exceptions was Sergey Brin's family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
A friend of mine who manages ultra wealth people said most people who turn up don't say "How much can you make me" but say "Can you make sure I'm never poor".
It's often about preservation of wealth more than gains for these people.
That said I've discussed some returns they make and it's incredible. I don't want to say what I recall, as it was a couple years back and it sounds like an exaggeration. They said this is partly because they get access to deals that don't hit the wider market and you need serious cash to get in the room to have that chat. And I guess these manager have a bunch of the right people attached to them so it makes an easy stop.
>They said this is partly because they get access to deals that don't hit the wider market and you need serious cash to get in the room to have that chat.
This is something I hear a lot and I just don't get. Are the people on the other side of those deals just...not greedy? After all, you are implying that the deal has better expected returns than what people are buying on margin in public markets, so why doesn't the person on the other side of the deal take a little more for themselves by selling there instead (at a slightly more favorable interest rate)?
Is it because the rich investors are needed to bring some level of expertise or connections to the investment to make it work? If that's the case, and it seems likely, I would not say they are getting "access to better deals" per se. More like they are getting a normal rate of return and they have a valuable asset that they are renting out as well (their expertise or connections), and it all gets rolled into one number. But complaining about the rich having valuable assets is different from complaining about them having access to better investment opportunities.
Example: if I'm an entrepreneur and I see an opportunity, and I have a friend with the resources to support me and who also thinks this is a good idea, then I'm not going to go out and raise funding from random strangers.
You'd be surprised how many deals like that are out there. Many entrepreneurs do business with a few solid partners during their lifetime.
Aside from that, there are other reasons:
1. You don't want to invest everything in the public markets, i.e. acquiring an interesting existing business and growing from there could be a good idea.
2. Some of these businesses might be less prone to losses during a recession or stock market correction, so they might serve as a buffer for cashflow and income.
3. These deals might have higher upside, because of information asymmetry or something that isn't blatantly obvious to other people. Alternatively, you might have access to different channels that could easily grow the business.
The sole reason that the path to public markets is a long and compliance-ridden one is enough to seek private investment. It's much harder to raise money in public markets than private ones.
But far cheaper to raise money in public markets than private.
Once you’re big enough, IPOing makes sense, unless you just want to maintain control or those pesky compliance requirements will reveal some harsh secrets.
Think of it like a venture capital deal. If you wanted to invest in Uber in their seed round, you couldn't get in the deal unless you had a fund set up or you were an accredited investor and had a connection to the founders.
This type of deal can get you huge returns but is also very risky.
Is it because the rich investors are needed to bring some level of expertise or connections to the investment to make it work?
My first thought was regulation. See: accredited investor. One can sell to accredited investors, and caveat emptor, or get buried in a whole new ass-load of paperwork and butt-microscopes selling to retail.
My second thought was scaling, or selling in volume. Why do companies sell wholesale? Because they don't want to deal with nickel-and-dime buyers, there's a whole new set of infrastructure and process needed for that. Take a little less profit to sell one big block rather than doling it out to retail investors.
They’re called “bought deals”. An investment bank has a public-traded equity desk that will buy, up-front, $x billion of your stock at $Y. Then they’ll email blast/call their retail investors to buy it up over the next few weeks.
The banks take the risk of not filling the order with retail buyers, which happens occasionally.
Deals outside the wider market likely carry more risk, but when they work out, more reward. The other side of the deal may have time pressure and also doesn't have so many investors to shop their deal to, so they may not be able to be that agressive either.
you're missing a couple of other factors, one is timing and being bale to move quickly, a perfect example is the warren buffet's investment in GS during the financial crisis [1]. GS didn't show that deal to the world - it went to someone that they knew could act quickly (one decision maker) and stroke a big check....
As the articles alluded to, buffets investments during the crisis (I think he also took a big bet on BoA), were not a result of him being able to move quickly. They didn't need the money as badly as they needed the good PR. If the headlines read that GS had raised some capital from a bunch of "no name" investors, that wouldn't have had nearly the impact of their press release that THE Warren Buffet just invested billions in GS - so obviously he thinks we are a good bet.
Now of course, buffet also needed timing and the ability to act fast, but lots of people had money to invest then.
I imagine there can be some deals that people don't really want to make public even if they aren't strictly speaking illegal.
One such a deal that surfaced somewhat recently was that cum-ex trading. If you put that in the public market, you would essentially be killing the goose that's laying golden eggs since there would be outcry to make it illegal. If instead you just offered it to select few (people with enough capital & no moral qualms about using it), you could keep it under the wraps for longer time and get better long term return.
I deal with multiple folks who have them. This is the real goal, though tongue-in-cheek. Ultimately they want monies to increase as the family logically increases in size.
>One of the exceptions was [Person]'s family office, which managed a shit-ton of money and had some good people who actually knew something about portfolio construction.
I'm not sure what type of professional you are, but you may be in breach of your responsibilities by disclosing the specifics listed above.
I know this message might seem silly, but I'd hate if you got in trouble for complimenting the guy's affairs.
Edit: I've editted out the person in question's name in case you do the same.
Well, not so random, seems like it would be pretty easy when you give narrow personally identifiable snippets like "I worked at a portfolio analytics company so I had free reign to snoop around"...
Who knows other similar comments they've said in other threads on HN?
Was thinking the same thing, but I'm sure they still want to have a portion of their portfolio in high risk high reward investments. I also wonder if they can get better deals (Warren Buffet style) by taking large positions direct vs. buying indexes through a broker.
1. Companies don't die, so are not liable to inheritance tax.
2. (Holding) companies often don't pay capital gains taxes, so money can compound tax free. You only pay tax at the end, when you take it out of the company.
3. If they're using (some) debt to invest, using a company shields them from liability and bankruptcy (Google Einar Aas, he bankrupted himself in personal name because he traded using a personal account with leverage)
Depends on risk tolerance and how flashy they want to be.
Donald Trump, if his public finances are to be believed, would have roughly the same net worth had he just invested the money his dad gave him in mutual funds. Instead he managed to create a series of failing companies and questionable ties... but managed to live the high life and stamp his name on bloody everything.
To offer a better and less political answer: the reason that an UHNWI doesn't park their entire net worth in an index fund is because there is some probability, however minute, that the markets will collapse and never recover.
Additionally, we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities. For an UHNWI, this is likely enough to beat the market, especially if a high percentage of investors are passive, leaving more opportunities for corrections open.
As another commenter said, the goal is usually to avoid becoming poor first and foremost, rather than becoming richer.
> To offer a better and less political answer: the reason that an UHNWI doesn't park their entire net worth in an index fund is because there is some probability, however minute, that the markets will collapse and never recover.
Sure, but it seems like the solution to that isn't "new and innovative private investments", it's "invest more money in treasury bonds from stable first-world governments and maybe precious metals".
>> we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities
Is this also true at the level of the small investor ?
Say I'm willing to spend a few hours a day learning and researching about stocks. Does this mean that over time, I'll be able to significantly beat the index funds ?
Or is it, more likely, a fool's errand, because that as a small investor, I don't really have enough bandwidth and money to significantly diversify ?
It's a fool's errand. There are people who spend 80 hours a week doing this kind of analysis at firms that pay millions of dollars a year for the most sophisticated data and analysis, and those folks still don't beat the market more than randomly. These firms pay hundreds of millions of dollars to improve their trading systems' latency by just a few milliseconds.
You don't have a chance unless you are doing the same amount of work with more sophisticated tools, with the same trading tools.
You might win based purely on chance, but you are extremely unlikely to.
Some of the high frequency traders can rake it in. But they are using teams of highly paid analysts to look for opportunities and those opportunities don't last long before they have to move on to the next thing. And I would assume it's getting harder and harder for them as time goes on and more enter that market.
> Donald Trump, if his public finances are to be believed, would have roughly the same net worth had he just invested the money his dad gave him in mutual funds.
There was a factoid going around years ago that said Donald Trump's net worth was equal to the value of his inheritance if it had been invested in an index fund.
But note that under that hypothetical, he never would have spent any of it. Do you think the historical Donald Trump ever made any splashy purchases? Where did that money come from?
Having a high net worth while living the high life involves a lot more money than having a high net worth while living an ascetic life, and implies that his returns were a lot more than the index fund experienced.
Trump's net worth is actually measurably lower than what his inheritance would have been worth if it were invested in index funds.
Also, while some of Trump's lavish expenses are pretty much just lavish expenses (business jets and the like), some of his superficially ridiculous personal expenses, like gold-plating half of his entire penthouse apartment in Trump Tower[1], don't necessarily hurt his net worth that much because he could always sell the tower with the tacky gold-plated penthouse to someone else who could extract some value by removing the tacky gold plating and having two valuable assets left over: (a) a penthouse apartment in a Manhattan high-rise and (b) gold.
Most of Trump's losses came from a variety of failed business ventures, which isn't necessarily a huge criticism. Some people just like doing a bunch of business ventures and they don't all have to succeed to be a net positive. It's just that if Donald Trump spent the same lavish amounts of money and invested less money in his own ventures and more money in index funds, he would be richer today.
Of course, in this hypothetical scenario, would he become a cartoonish real-life personification of American capitalism, host a reality TV show, get a lot of Twitter followers, and develop the dedicated fanbase necessary to eventually be elected President? Probably not.
[1] I'm not entirely making this up, though my only source is a foggy memory of the first season of The Apprentice, when Donald Trump invites the guests to tour his penthouse apartment.
Of all the very rightful criticisms leveled at Trump, ridiculing him for not putting his money into index funds is one of the worse ones. Building businesses is its own reward. People don't get it that just like painting or writing, people can get satisfaction from seeing a venture to completion or inking a good deal
And if he enjoys building businesses enough to make up for the massive opportunity costs for investing his money in Trump Steaks instead of index funds, that’s entirely up to him, but let’s not laud him as a business genius for it.
>that said Donald Trump's net worth was equal to the value of his inheritance if it had been invested in an index fund.
Incorrect, it would have been worth substantially more, at about 13 billion (his current wealth is around 3-4 billion). So he still would have been able to spend billions and be further ahead than he is today.
First of all you're wrong, I did read the article. Secondly, the author directly addresses that point. He was leveraged when buying real estate too, so why not assume he would be leveraged up in the stock market? It's not an uncommon practice at all, and the comparison wouldn't make sense without factoring in loans.
Frankly I would have done the same, I think running a bunch of different businesses would be more stimulating than maximizing wealth through stocks. But objectively he's paid a financial price for that.
Which is why it's so interesting that the NY Times article ( that exposed his success as a product of a huge inheritance) didn't get much traction among any of his followers.
I remember listening to an interview with the bylines. Everyone in that interview sounded so sure it would dent Trump’s reputation. Man, I’m really not a fan of the guy, but his opponents have absolutely no idea what they’re up against, and haven’t for a long time.
Trump is the harbinger of a return to patrimonialism. Family offices, a return to patrimonialism. You get a bunch of people who never really understood civics or finance and you try to govern them technocratically, and you’re going to struggle. But everyone in this demographic understands families. They see this dude being passed down wealth, and ‘making something’ of it, and setting his kids up. People understand that, especially the type of person who doesn’t necessarily understand how the neoliberal world works, in ways that are both in their favor and against it.
Family offices are another data point in this trend towards capital accumulation, stark income inequality, and a retreat from public exposure.
Except the premise is in accurate. He wasn't left with $1m. He was left with hundreds of millions in cash and cashflowing assets. Had he invested $250mm in the markets back then, he would be much ticket today.
Except it was likely property, and he couldn't liquidate those properties without incurring capital gains taxes (set at 49% in 1970)?
I don't know, perhaps you couldn't very easily leverage properties back then for cash (i.e. once they had been paid off), or interest rates were very high (a quick google teaches us that in 1970, the interest rate was 8.5%)?
It actually wasn't property, a large portion was cash in terms of salary collected as an infant or various gifts. There was a report by NYT not too long ago.
agreed -- not likely, and it assumes those gains every year which is not reasonable. More, it ignores one very important fact, the destructiveness of losses. A one-year loss can be devastating to a fund. which is why many favor "safety" over "gains".
It's not uncommon for aggressive growth funds to take a 20% tumble in a year. Downside is much, much more destructive than many understand especially when one must also account for fund management fees (typically .7%) which are collected whether the fund gains or loses!
But the simple fact is that a 50% loss requires a 100% gain just to get back to even, which is still a loss once inflation and operating costs are factored in.
Here's a simple question that most people fail:
Q: A mutual fund loses 50% in a year. In order to break even the next year, your fund must earn ?
1) inflation
2) 50% + inflation
3) 50% + your income tax rate
4) 100% + inflation
5) 100% + inflation + operating costs + 'it depends'
The correct answer is 5. The correct answer is nearly 106%- One must make up for actual loss (100%) PLUS operating expenses for both years (usually 0.7% per year: 1.5%), plus inflation for both years (2%/annum: 4%). Of course there are tax implication for gains/losses taken outside of a qualified retirement plan (401k,403b,etc.) and sheltering losses can complicate substantially, but hopefully this illustrates a point about the impact of losses.
You're not considering a) leveraged stock purchases (using debt, like he did with real estate) and b) that his inheritance was significantly more than 1MM. Check out this analysis from forbes:
$1M as "small loan" in 1968, then becoming president of his fathers real estate company 1974 (shares divided among Donald Trump and his 4 siblings) estimated at $200M ($40M for him but not liquidated at that point), and then inheritance from his father in 1999 estimated between $20M and $300M.
Slightly more than the infamous small $1M loan then.
If you were smart you’d delete this comment and possibly your account. It’s not worth disclosing personal information about a client you worked on, anywhere online. Seems like an unnecessary risk, regardless of how trivial you think it was.
There was a line from the first season of the TV show Silicon Valley: "Are you kidding? [Rich VC] would spend a million dollars just to mildly annoy [competing VC]!"
How do you cope with that? That people whose financial decisions involve 100s-of-poor-people-lifetimes levels of money are still so irrational in their motivation?
A close friend of mine works for the Rothschild family office. He described to me how Lord R and his son don't see eye-to-eye on the family money. A lot of time has apparently been spent on reports making Lord R look better than his son at investing.
Right up until 1999 this was a meaningful position with actual political power. Even now, non-hereditary lords comprise the upper chamber of parliament.
Being a Lord in the UK is more or less equivalent to being a US senator.
My preferred personal pronoun is "lord". Pretty soon it will be required that people call me "lord" or I will get offended and take them to whatever human rights commision is appropriate.
As that wiki link points out, wealth isn't entirely public or measurable; so the list isn't complete. It explicitly excludes dictators and royalty (so, hey, saudi family!), and " excluding and ranking against those with wealth that is not able to be completely ascertained"
That makes perfect sense of course; but all those excluded parties from that ranking still need to manage wealth, so getting exact or even estimated numbers here is going to be tricky. And then there's the family != person disconnect - although it seems to me that most people in this situation got lucky somehow, so it's rather unlikely there are multiple original sources of wealth in such families. If there are several individually wealthy family members it's probably more likely due to dilution.
But yeah, you'd assume the median family wealth of a the top 0.001% of people is likely below 1 billion. But how much? Who knows.
> If there are several individually wealthy family members it's probably more likely due to dilution.
While this is probably true in general, there are at least two famous exceptions from Germany.
There is the notable case of Adolf "Adi" Dassler, founder of Adidas, and his older brother Rudolf Dassler, founder of Puma, who separated from their joined shoe manfucaturing business and independently built two of the largest shoe (and now sports equipment) manufacturing companies in the world. Both still headquartered in the tiny 23000 people city Herzognaurach, Germany (close to Nuremberg).
And the similar story of Karl and Theo Albrecht, founders of Aldi (Albrecht Discount), which was split in Aldi Nord (north) and Aldi Süd (south), both growing their company in billion dollar businesses and each becoming billionaires. Granted though they had slightly different styles of running their business, their success was based on the same innovative business idea and a geographic non-compete agreement.
In both of those instances, wasn’t there onebusiness that they split into two? That’s still one source of wealth. They just divided it earlier than death.
I struggle to understand the point of the article.
>Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked.
OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it.
>As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power and feed inequality.
How on Earth is it related to populism?
>Family offices have created inequality.
If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.
At a micro level, taking money out of a deposit and investing it does not create inequality. At a macro level, the fact that simply having wealth begets more wealth in a way that labor cannot accomplish is a driving force behind inequality.
Up to a point. The ultra-rich have so much money now that it would take a monumental disaster for them to become poor again. IIRC only one person in history has ever stopped being a billionaire: J. K. Rowling, and that was due to enormous philanthropic giving.
Mere millionaires come and go, but once you're talking hundreds of millions the positive feedback loop of capital makes it difficult to lose everything.
My hypothesis of the world is that someone must have luck AND skill to become 100M+ wealthy and I think people commonly create a false dichotomy of luck OR skill.
Maybe the reason we never see hundred millionaires lose everything is because they have the necessary skill to manage the money well.
I don't think it would be correct to attribute causation based on the information we have available.
This article suggests that their investment strategies may be suboptimal in many cases.
Some of it may be the forced diversification you get with this much money. It's hard or impossible to dump $100M into a single stock unless you are an Elon Musk type and own the company. So if you make a bad bet and lose a million bucks, well, that's just 1% of your portfolio and the rest will make up for it. Of course you're a regular millionaire and lose a million bucks on a bad investment you are going to the poorhouse.
You could dump $100M into GE without triggering anti hostile takeover actions, but they're also not likely to go bankrupt anytime soon.
Maybe some hundred millionaires could have had their portfolio completely tied up in Lehman Brothers a few years ago, but even then you probably would have gotten a fair bit of money back.
But this goes back to my point that as long as you aren't pants on head with your investments you are beyond the point where it's possible to ever be poor again.
I think it's not possible conclude on optimality without firmly understanding the specific goals.
The articles says 'But the aim is usually to diversify risk, not concentrate power, by taking capital from the original family business and putting it into a widely spread portfolio.'
It uses the word 'usually' and it's also a blanket that's trying to generalize all these parties, while in a reality that may not be true.
Here are 3 constructed but plausible goals one may have:
1) Make 100% sure that you remain wealthy (make almost nothing but never lose anything)
2) 9-in-10 chance to do worse than SP500 index, but 1-in-10 chance to get 'literally take over the world' rich
3) Investing in causes that seem good for the world a la green energy, tesla motors, etc
As a counter example, I present cases of lottery winners who go broke. There are multiple documented cases of 10+ million and 100+ million winners who lose the majority of their wealth.
Even if it happened rarely capital gains would be a force driving inequality as the barrier to entry into investing your capital to offset for doing actual work remains high. That it sometimes fail would be sad for the ones it failed for, but still doesn't stops it from being a driving force for a big effect on the economy.
I am honestly curious as to what you found confusing. I think it's fairly well structured and written.
> How on Earth is it related to populism?
A populist would generally be opposed to the concentration of wealth and power in a small subset of the population. Populism is on the rise today, as is the trend of family investment offices which are a result of concentrated wealth and power. Thus family offices are destined to face uncomfortable questions by populists.
> they didn't create inequality.
Yes, you're agreeing with the author. The surrounding sentances from the sentence you quoted:
"[...] the objections to them [family offices] will rise exponentially. The most obvious of these is the least convincing — that family offices have created inequality. They are a consequence, not its cause."
The article does not say that family offices have created inequality, it actually says that they have not.
Regarding the "point of the article":
This is an Economist "Leader", which is a one-page summary of the three-page full article published in the print version of the newspaper. It says the following:
2) Explains why the populist argument "family offices create inequality" is wrong.
3) Presents three arguments for "family offices are bad" with which the author does not agree, and their rebuttals:
a) "family offices destabilize the financial system" - but data shows that actually they are doing the opposite.
b) "family offices magnify the power of the wealthy" - but this is against the interests of their owners who want to diversify.
c) "family offices might beat regular investors because they have privileged access to information" - they don't outperform the markets right now, but privileged access to information and insider trading could be a problem with family offices.
The author arrives at the conclusion that family offices are a force for good, but more regulation and transparency might be required to address (3c).
> A populist would generally be opposed to the concentration of wealth and power in a small subset of the population.
You (or the author of the full piece) seem to be describing Socialism. Populism is sometimes but not necessarily opposed to a wealthy elite, and the type of populism on the rise in the US and Europe seems generally to be a vague conception of a cultural elite, instead. Seems odd to bring into this discussion.
> If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.
Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in one place, then you very directly create inequality. That's exactly what inequality is. By definition.
Money ownership didn't change when money management switched to family offices. So distribution of wealth hasn't changed. How did family offices create inequality?
I think the author is suggesting that society would be better if rich people were to end up so mired in the principal-agent problem that they ended up with no more influence on the market than the average person. Of course, this appears to overlook the fact that if you don't like it when people accumulate power, then you actually want corporate executives to be beholden to an active stock market.
In this case I suspect the author is talking about a popular interpretation of populism where a politician in question intends to make sweeping changes to constitutions and rights where those are seen to be working against the popular interest.
In this case the answer might be to curb the rights of specific types of family investors somehow, for instance in European property markets (to take an example from the author) where this is seen as distorting the markets and causing pain to people - for instance not being able to afford housing, or ending up in negative equity because such funds pull out of the market and cause a bubble to collapse.
>If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. //
If you can afford to invest, and do so successfully, you therefore make money from others labour. As poor people can't do that, any successful investment is contributing to wealth inequality.
In general, if you win on investments someone else is losing.
This means that if having large capital base means you have accessv to better investments - eg avoiding large fees - then you'll drive more inequality.
To recapitulate: There's only a certain amount of wealth generated, if you receive "higher reward" without doing more wealth generation then those generating the wealth are getting a smaller proportion.
Back when I was fantasizing about what I'd do if I won the lottery, I looked into family offices a bit and concluded that there's basically no point as far as the investing advice goes. It's still likely a good idea for some of the ultra-wealthy for estate, tax, and philanthropic purposes, but on the investment side? The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets. And as a bonus, you don't need to stake your fortune on a trust-based relationship. Instead, you get to base things off of institutions and audits - Vanguard isn't going to take the money you shoved into VTSAX and embezzle it through investing in their distant cousin's "company", even if it is a billion dollars.
There is one point you haven't considered:
Even though a pure indexing strategy is appropriate, it is not appropriate to use Vanguard for this. At the billion-dollar level, assuming that the index funds had an expense ratio of .05% (among the lowest out there) you would be paying annually:
1,000,000,000*.0005 = $500,000
For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well.
VIIIX's[0] Institutional Plus Shares (with a $100 million requirement) has an expanse ratio of 0.02%, so that's $200k.
It would be hard to find someone at this salary level who can match the tracking performance of Vanguard. If they achieve a tracking error that's 1% higher than that of Vanguard's, that would mean an annual loss of approximately $800k compared to Vanguard (1,000,000,000 * 8% * 1%).
This really is a no brained. With such a small fee with such a large investment you’d be extremely hard pressed to beat that performance (if all you wanted was to match an index).
a one-man office or other service provider that can buy the individual stocks
In the given scenario, you aren't just hiring a guy to buy stocks for the Vanguard expense ratio. You're also buying all their financial and information security processes. You're buying risk mitigations like regular audits and SOX compliance and SP800-53 controls. To safeguard a billion dollars, that overhead is totally worth it.
The S&P 500 publishes changes to the index in advance of the changes taking place, so all of the affected stocks have prices that reflect the change at the time of the change.
Most tracking indexes, especially the ones Vanguard uses, do not do that and thus do not allow the markets to front-run them. If you adopt the strategy of "do what Vanguard does" and you do it immediately after Vanguard says they did something, you are already too late to get the prices that Vanguard got and can kiss at least .05% goodbye just based on that. I would expect to under-perform by at least .25%, if not more.
VTSAX is 4 basis points of expense ratio. There are others with 3 bps and Fidelity has one with 0.
Even at 5 bps on a billion, I think you'd be extremely hard pressed to do everything Vanguard does for you for $500K/yr.
I'm at least a factor of 500 away from having to consider this question, but if you told me it would cost me $500K to have one fewer critically important person on my staff to deal with, that would be a good tradeoff in itself.
There is additional value that can be added by forgoing an index fund, though. Tax management can be enhanced by rolling your own Total Stock Market index fund, since individual names can be harvested for capital losses, increasing the after-tax returns of your portfolio relative to a vanilla index fund. I'm not sure quite how to quantify that, but I'm sure someone has been able to do so.
You can write off capital losses up to the amount of capital gains plus an additional $3K. So, if you have $5MM in capital gains, especially short-term, it makes sense to sell off up to $5MM in capital losses.
Yeah, I don't think it's that great of an idea. Any sort of operational or execution-related risk you introduce by replicating indices with single names could cost you a lot more than $500k and really isn't worth it.
That's really funny. One man recreating Vanguard's business single highhandedly and doing triple duty with tax planning and philanthropic services and doing it for less money than Vanguard can do just the index funds. Thank goodness the knowledge to handle each and every one of those services, at an expert level, is interchangeable.
Agreed with what everyone else has responded to counter the claim that a one-man family office can reproduce Vanguard's VTSAX. Such a family office also has to contend with other giants trying to claim the G.O.A.T. title for asset management companies [1] with incredible scale efficiencies. The stakes are "for all the marbles of the game" high [2], and they're using all the benefits of capital scale they can scrounge.
The likelihood of a single person delivering index tracking performance better than these giants is pretty slim. Better to drop the tranche designated for broad market passive indexing into one of these giants' funds as an institutional holder, then have the one-man office project-manage leading education of younger generations, help the family leader clarify the ongoing family mission the office supports, the accountants' filing tax compliance at the individual and trust/foundation levels (likely in many different jurisdictions), grooming a successor, updating processes and procedures to improve auditability/accountability/anti-fraud detection, assisting with legal compliance, helping out with financing approved moonshots, etc.
> For that level of expense, you could instead have a one-man office or other service provider that can buy the individual stocks comprising (or closely approximating) the index, and not have to pay any expenses other than his salary and trading costs. Meanwhile he can provide tax planning/philanthropic services as well.
But then you have to trust that guy not to fuck it up, while Vanguard has a stellar reputation and a whole office of people making sure things go as expected.
Tracking error against the index, auditing, security, and financial controls are more important than a couple basis points.
Honestly a much stronger argument is tax efficiency. If you're buying the individual stocks, then even when the index is flat you'll have some capital gains and losses. You can use both these to improve your tax efficiency - the losses can be harvested to offset realized gains elsewhere, while any appreciated shares can be donated to charity and repurchased with new money, effectively increasing your tax basis.
Still, you're likely better off just hiring people to do the tax planning, estate planning, and philanthropic services. It's essentially setting up a single family office with no control over your investments.
Don’t forget: keeping track of the dividends and cost bases of a hundred or thousand stocks will heavily impact your accounting/bookkeeping bill each year.
And once you talk about foreign stocks, you have different amounts of withholdings to account for, dividends that are not dividends (return of capital).
Indexing might make sense for a portion of your assets but if you have enough wealth to consider a family office, your investment goals are much different than a standard retirement account. Whether it's a different time horizon or simply having enough money to invest in assets that aren't available to you in your company's 401k, things are different.
What you are missing is that family offices usually farm out most of their vanilla public market securities portfolios to people like vanguard, but that 1/2 to 1/3 of the portfolio is private or alternative investments and that is where the investment team spends a great deal of time. Additionally, a lot of the "team" is often focused on things like reporting, tax, estate planning etc.
> The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets
Family offices are more like endowments and follow similar strategies that will have a portfolio that includes a mix of public equities, bonds, private equity, hedge funds, and real estate. Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds.
In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. It took 8 years for the S&P 500 to recover from the dotcom crash and 6 years for the 2008 crash.
>Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds.
They can also provide worse returns. You don't know which. You can guess that they'll provide average returns, because the average investment gets average returns. After all, not everyone can be above average.
Passive indexing guarantees average returns. Before costs, that is. So not only is the indexing approach cheaper, but it's also safer.
>In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that.
Quite the opposite, IMO. If you do something straightforward like dump 100% of that into the S&P 500 and spend the dividends, you're looking at something like $1.8 million this year. Less in a downturn, of course, but that's still pretty difficult to spend.
And if you have known large expenses, fixed income is really efficient at guaranteeing you the money needed to meet those expenses.
> They can also provide worse returns. You don't know which.
You do. That's the whole point. If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years. Yale is a great example of this; over the last 20 years their average returns are 12% which is 50% more than what an index did (7-8%):
>If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years.
I'd happily do a total-return swap of the S&P 500 against any basket of VC and PE funds you'd care to name that are currently accepting new investments. Assuming, of course, that there's some reasonable way of collateralizing and settling things at the scale I'm willing to risk ($10k notional), which I honestly doubt.
If beating the market was that easy, then everyone would do it. So either the top tier funds become closed to new investment after becoming top tier, or they stop over-performing for idiosyncratic reasons, or something. I'm using outside view logic here, I really don't care at all for the stories they tell. It's honestly downright dangerous to pay too much attention to the marketing material of investment funds - after all, Bernie Madoff consistently showed 11% annual gains. At the end of the day, the average investment must achieve average returns.
> If beating the market was that easy, then everyone would do it.
It's not easy. You need $100m+ of capital and a long time horizon to implement it. Very, very few people have that. It's less than 0.0004% of the population.
If I was a billionaire, I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways.
I don't think active management makes sense for the majority of folks, but billionaires are exactly the kind of people that it does make sense for. With a billion or two you can probably get yourself into some pretty good closed-end funds (if you're savvy about it) that will probably deliver better risk adjusted returns than vanilla passive.
Personally, if I had the money, I would go with 2 Sigma or AQR. Both of their past returns streams are stellar and uncorrelated with the markets.
You also need to consider overlap of investments with the main source of income. For Bezos, it makes no sense to just buy a NASDAQ ETF since most of his wealth is already highly correlated with it. Either he hedges this effect out or skews investments otherwise. In either case he'll need knowledgeable people that can plan the effects on both financial and tax side.
That's also a likely reason why family office holdings often look very odd as they often only provide a hedge in case the main source of income dries up. And therefore, they cannot have any connection with it. Pure performance on a standalone basis is often only second priority.
> I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways.
Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?
80% of companies in the S&P500 over time produce zero return. 20% of companies account for ALL of the returns. In the past these would've been driven by massive growth stocks like Amazon going 1000x over a couple of decades. Now, the main reason to IPO a tech stock seems to be because the company has reached its growth potential and you want to flick it off to derisk early investors, and often it plummets as reality sets in. Meanwhile, high growth stocks are captured in pre-IPO markets and the gains are all accrued to private investors.
I think the S&P500 is an entirely different beast to what it was 20 or even 10 years ago as a result of this.
If you were a family office your goal would be to get exposure to pre-IPO growth stage stuff as well as the public market.
You don’t consider 100% exposure to purely US equities a problem? It’s a huge risk, especially in this market.
With a couple billion you can get yourself some nice deals in a bunch of different asset classes. Also with that kind of money you can put a chunk of your money in illiquid investments that potentially could provide some great returns.
It depends on your needs. You may recoup the perceived investment losses via tax savings or other factors.
Also, when you get into aging family members and generational wealth issues, you want to have controls to reduce your immediate control. Decades of accumulated returns can be wiped out by a bad decision.
If I had billions to worry about, I’d want to make sure I had assets that were more diversified than what Vanguard offers.
Not refuting your assertion, but the concentration of power in tracking funds is a looming problem. The FT did a bit on it last week. Here's something similar from the motley fool:
Only a looming governance problem, but not in any way a financial performance problem. Only the latter will trigger any real reaction from the markets, and Bogle thinks that won't likely happen until 70% of market under passive indexing at a minimum.
Governance concerns are not structural and addressable when it reaches a critical mass. I wouldn't be overly concerned, just put in a word when someone starts to lobby for regulation requiring delegating voting power back to index investors, and fund managers having to vote the preponderance of pro-rata voted shares.
The article only considers new investment. Jeff Bezos may be worth $150bn, but approximately $125bn of that is in Amazon stock. He's 80% invested in Amazon.
Does it really matter where the worlds richest man puts the other 20% when he could afford to lose it all on moonshots and not give a damn? The risk-reward trade-offs you and me make while investing just don't apply to Jeffs personal investment decisions, and therefore aren't all that interesting.
His wealth concentration is actually quite higher, around ~94.7% in AMZN stock. Bloomberg has him currently at a $132b net worth, with $125b in Amazon.
The rest is Blue Origin and The Washington Post, with his cash position at 'only' an estimated $2.45b.
Given the absurdly high valuation of Amazon - and as a fan of humanity pushing into space - I'd like to see him sell some larger blocks of Amazon while the stock market is so high, in order to secure funding for Blue Origin for a decade or more all at once. In terms of dilution, it's drastically better to yield ~$6b-$10b on a few sales out of a stake of $125b, than out of a position worth ~$65b (where he was at just two years ago) if the market is down for a long period of time. Especially true given he has recently indicated Blue Origin might demand even more than $1b per year.
Whether you should mortgage or sell your Amazon stock obviously depends on whether you think the price of Amazon stock will go up or down. The comment you're responding to explicitly assumes it will go down:
> Given the absurdly high valuation of Amazon
In this case, taking out a loan against the stock is a terrible idea.
I'm not so sure if he could easily liquidate larger block of stocks without affecting price/panic much. Maybe in long period of time by periodically selling minor amounts. Amazon is Jeff and Jeff is Amazon, I wonder what would happen and how markets would react if he disclosed even slightest hint of his exit intentions. Also fan of humans conquering space though, and would definitely love to see that happen.
True, and a scary thought for any heavy investors. That's why a company that size needs to have a publicly known succession plan given current valuation. There are people at Amazon who could take over but no one whom the market would trust with taking the reigns, right off the bat.
People were saying Berkshire needed public succession plans for several decades before Buffett eventually created/disclosed them. The stock did really well during those decades, and virtually every other public company turned their CEO over many times.
Debt always matters when it's that large of a sum. If he borrows $10b over six years against $65b in shares, he would have been dramatically better off liquidating $10b worth of stock over ~18 months when it was worth $125b-$145b and having zero debt. He's 54, has been at the helm for 24 years and isn't going to run Amazon forever, the market isn't going to freak out if he sells a few points more of stock.
Is Amazon heading toward an 18 PE ratio against $20-$25 billion in profit? $360b-$450b market cap, versus a $778b market now (already down ~$250 billion from the highs). At some point in the near future will their profit growth stagnate, Microsoft or Intel style, for most of a decade; and will their multiple compress over time with that stagnation? Historically that's the very likely outcome (or far worse).
The stock market goes down with the next recession, the very high S&P 500 / market multiple gets chopped down to a more reasonable historical level. After several years pass and the smoke clears, Amazon's AWS growth has slowed considerably, its online retail growth is single digits, and the market awards it a mature slower growth 15-20 style PE ratio.
There has never been an exception in the tech world, when it comes to multiple compression. The compression monster comes for everyone. Microsoft, Intel, Cisco, Apple, Facebook, Google, etc have all suffered it. There will never be an exception. Amazon isn't going to get an 80 PE ratio on $20b in profit, the market will squeeze it perpetually down. It's very likely the party top is already over (the next time we see such absurdly low market-supporting interest rates, it'll be because of a recession, and stocks will have plunged accordingly).
When it comes to the cost of funding Blue Origin (which is very high), I think he will have wished he sold more stock while it was on the moon during this stock market bonanza, where even very low growth stocks like Intuit are still fetching hilarious 50 PE ratios.
And these are the reasonable scenarios. The dangerous scenario, where you're nuts to borrow $10 billion against stock, is where Amazon is disrupted (AWS particularly), or the economy gets really bad and Amazon gets a 16 PE ratio against $18 billion in profit (still not actually a bad outcome even then). In that case, Bezos is now borrowing $10b against ~$45b in shares or less. Non-trivial leverage, even for that much wealth. Or you could just easily evade all the major risk scenarios, sell off 1.6% of the richly valued Amazon stock - just 10% of your holdings - and fund Blue Origin debt free for a decade or so without concern (hopefully to the point of self-sustainability). And you do it while the market is bubbly, precisely because shareholders are far less likely to care then.
Frankly, you can napkin math all of this you want, but it's very likely he has very smart and very well paid financial consultants who do all of this specific math weight against the cost of debt/capital/etc for him.
In other words - let's stop speculating here and simply say "I hope he continues to focus a large portion of his wealth towards X initiative that I like"
He owns ~16% of Amazon so dividends on your hypothetical 20+ Billion in profit can cover a ~1 Billion per year hobby. Even ignoring his CEO pay and other investments.
At this point maximizing ROI is probably not a major concern for him.
It's extremely interesting - you're not interested in the investments of someone who buys investigative journals and makes rocket/space exploration companies? While these may be little side-projects to you and Jeff, to the rest of us they are very very important.
Why are they very very important? Not the companies, but the fact that Jeff Bezos in particular has invested in them; what's "very very important" about that?
Do you think these companies wouldn't exist or be as capable without Bezos? Why do you think that?
He doesn't mean it's particular to Bezos, but that wealthy people throwing massive (to anyone but them) amounts of money into extremely speculative bets on large issues for the long run of society is a big deal.
The government and major corporations are slow and inertial, invested in iterative improvements on existing paradigms, as low risk small improvements are baked into the foundation of the incentive structure for their entire org. If you're CEO of a major company and make the company a tiny bit more efficient your life is great, but if you bet a billion dollars on pivoting the company towards a potential major improvement and the numbers come up wrong, your business is potentially structurally compromised and your life is relatively screwed. It's just not really worth it to gamble with your main game.
These extremely speculative, niche, very capital intensive, long time horizon bets on paradigm changes couldn't exist without large amounts of funding from contrarian and extremely risk tolerant backers.
Very wealthy people being willing to play with millions to billions of dollars in a way that is very likely to crash and burn enables risky exploration of paradigm changes like "can I get a rocket to land upright and use it again?", or "can I take a major publication and profitably revert its online funding model to subscriptions to retain integrity of its journalism in the era of the attention economy?"
That kind of exploration is important and interesting.
Jeff Bezos isn't necessarily more important than other people that also invest in impactful things, but he is the wealthiest person in the world and invests in speculative things that impact how the world works, which is kind of a big deal.
Also, the parent comment did say that the projects are important, not Jeff Bezos. I was just talking about the interaction of wealthy investors and their side projects, which is what this thread is about.
Look at the changes that have occurred with Washington Post in the five years since Bezos bought them. Pretty clear that WaPo benefitted from Bezos' leadership.
The family offices I've worked with do pretty much everything. Part of the reason to do everything is that you have the freedom to do so. I literally called a friend on behalf of another friend to get him a bridge loan for a house once.
A free mandate makes for more interesting work, plus as the manager you can stick things in illiquids that have no mark-to-market. That's the uncharitable view, of course. The charitable view is that you are better at evaluating opportunities and are able to do things other institutions are not.
Main thing about FOs is they are just the article says, totally idiosyncratic. One FO I know is basically just a wily old guy who does all his business by phone, meets people to look them in the eye, that type of thing. Made a lot on crypto.
Another FO is basically a hedge fund. Bunch of different desks doing various things, a lot of focus on regulatory approval (that's still a thing, not sure why the article makes it look like there's no hurdles).
This actually happened in real life to Steve Cohen (the person Axelrod's character is loosely based on).
After being banned from managing outside capital, SAC Capital Advisors transitioned to being a family office called Point72. Only recently has it begun to to manage outside capital again.
The majority of the world's richest people have their wealth tied up in companies they either founded or inherited.... if they are investing their capital they have limitations most of us do not have to face. If I go from having to invest $1m to $100m to $100bn, my investment universe shrinks each time.
For example, a small investor can invest in companies with market cap of ~$50m+....not possible for Warren Buffet. He can only invest in maybe less than a few hundred companies...with market caps in the region of a few $100bn.... there are of course treasuries/bonds but no seriously wealthy person has all of their money in bonds. In part because the returns are so low and income taxes are meaningfully higher than cap gains.
On the other hand, if you don't have a lot of money, many investment strategies become infeasible. The move from 1mm to 100mm would definitely increase your investment universe, not decrease it. With 100mm you can do private equity, VC, debt, illiquid and obscure stuff, EM bonds, etc etc. Most of that you can't do with 1mm. But you are right that going from 100mm to 100bn definitely shrinks your universe.
Most PE funds have a minimum of $5m-$10m (less for VC)... so even $100m isn't enough to go directly to a PE firm....typically at this size, you might go through a fund of funds...
Even at a small size, it's possible to invest in alternatives through public markets. I have my pension in listed private equity. You can also invest in private debt BDCs and closed-end funds that do infrastructure and a bunch of other things.
The way Bill Gates is doing it makes sense to me, and I imagine many of the super rich probably find a similar model. https://en.wikipedia.org/wiki/Cascade_Investment It financially does not make sense to have all eggs in one basket, the risk is inordinate. This has been mathematically proven over and over again. When you're smaller and aiming for big returns, go for it. When you're bigger, your universe is a bit different.
Interesting to see the deltas (YoY) increase in wealth of these billionaires.
The top 5 have a growth of $8-15bn a year in wealth in the past few years. This increase in wealth is mostly an increase in institutions that keep growing at a very healthy rate (Amazon, Microsoft, BH, Facebook, etc).
I think it's important to remember that all of these persons (Bill Gates, Jeff Bezos, etc) are the primary owner of a large institution that creates the wealth. Building orgs to put money to use is what they did to make their money in the first place, so it makes sense that they would do that with their private wealth as well.
I'm not particularly convinced by the risks stated here.
Yes Bill Gates could buy 65% of the Turkish stock market, but if he wanted power, there are surely cheaper and easier ways to do it.
And regarding stability, you could make the case that these funds could increase stability. If you're in the 0.001% then surely you have the money to have a long term out look, which means they aren't going to worry about that short term blip.
I think the last paragraph headline sums it up for me. They've rediscovered DIY investing.
They mentioned presumably 'reasonable' risks, or else they wouldn't have mentioned them at all. I'm just not convinced they are even reasonable enough to bother mentioning.
The third issue (tax) is where the potential issues are, and got virtually the same length paragraph.
My impression was that they mentioned the obvious risks (and by obvious what the public and pundits might fear), and then immediately went on to say why it's not an actual risk.
After some small amount (5 million?) you are less interested in capital growth and more interested in protecting your capital. That’s what drives this the 0.001%
On the other hand, when you have $5M, you may want to protect it because if it goes down to $1M it makes a difference. For those ultra-wealthy though, if their wealth goes down 100x, it does not impact their comfort of living in any way. They just have less power.
I'm sure it still does not feel good psychologically so I'm not completely disagreeing with you.
The problem is that most very rich people have very concentrated positions. The family office might only manage 10% of the wealth with 90% being in one company. The investment then has to be structured so that the 10% survive even if the 90% vanish overnight (unlikely but not impossible). The performance on those 10% isn't that important, ownership in the company drives most of the fluctuation in wealth anyway.
"If you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time" --Buffett
It seems like the very rich feel comfortable having a large percentage of their wealth in a few investments. At the opposite end of the wealth spectrum, I like extreme diversification- caring to preserve some spending power in the face of an unknown future rather than maximizing investment gains. I believe that all people need to be happy is a comfortable place to live, good food and fellowship with friends and family. Because of this belief, a conservative highly diresified approach makes sense to me.
The article clarified that family offices tend to invest in a quite economically healthy way: diverse, and more attracted to startups. Which is why the consolidation of money this time around does not pose the same threat as 1998.
If you would like to learn why this common myth is false, I would recommend the book "The Ascent of Money: A Financial History of the World", which in one of its chapters explains that this result actually made the Rotschilds go almost bankrupt because they were betting on a prolonged war, and they were just barely able to maintain their wealth despite the defeat of napoleon, not because of it.
Yet even now the removal message refers to it as a “fun” fact, making me somewhat less enthusiastic about OP’s moral compass. Although, I guess, in the best possible light, and some squinting, one could consider this an artifact of inelegant phrasing, or anchoring on whatever the post previously said. Then again, when first told of the true nature of their post, the instant reaction was to defend it with pretend ignorance, not to do a quick search trying to verify it.
Meanwhile, that reply calling the original post anti-semitic propaganda remains gray. It’s somewhat telling that the community seems to consider a myth of jewish war profiteering more worthy than an abservant user calling it out.
But, to quote OP: anti-semitism, “no longer fun. lol”
HN + surrounding community have still not come to terms with what they have created, thus maintaing the totally irresponsible ‘absolutist’ view on free speech.
Because it is a story of dubious truth that supports the commonly held bigots theory that Jewish bankers secretly run the world, and was in fact spread for exactly this purpose.
Why is (was) this entirely truthful objection (see other posts) flagged? Is it now offensive to call anti-semitic myths, well, that? Even the original poster was (eventually, sort of) convinced.
TLDR: they use family offices, we don't know what they invest in as there's no transparency, and they didn't outperform the global stock market in 2016 and 2017.
I'm not quite sure how sites do it, but, lots of sites manage to enforce the article limit across even incognito and even across browsers... i pasted an archive.is link (http://archive.is/o3LVk) which is quite reliable for me and 99% of the time someone else already archived it.
So that's what those are supposed to do? Everytime I click on one I get an error, currently it's "Error 1016 Origin DNS error". Never actually saw what's behind that site but it does not seem like a working domain.
I guess when you that much money, more money means less than vanity and bragging rights.