Family offices remain wary of hedge funds

Despite the Madoff scandal being an increasingly distant memory, concern about financial fraud is still uppermost in the minds of the wealthiest investors, particularly when it comes to hedge funds, according to a recent study.

Corgentum, an operational due diligence consultancy, found that family offices across the US, Europe and Asia are doing much more due diligence on their hedge fund holdings as a result of concerns.

The study entitled Family Office Study: Taking Aim at Hedge Fund Operational Risk found 57% of family offices list fraud as the most significant operational risk facing hedge fund investors, followed by regulatory risks (21%), counterparty risks (9%) and valuation (8%).

Family offices cited the conviction of Bernie Madoff and similar scandals as the reason fraud was their primary operational concern for hedge fund investing.

The report stated that, due to the global economic downturn, family office investors have accepted hedge funds are facing an increasingly challenging environment to generate profits.

The study found that 76% of family offices now perform due diligence themselves or through third party consultants on direct hedge fund investments; this compares with just 18% performing due diligence two years ago.

Corgentum said the majority of other investment groups had begun due diligence of hedge funds a number of years ago, suggesting that family offices were late adopters of the process.

A lack of understanding about the specifics of operational hedge fund practices meant 73% of family offices did not feel they had the internal capabilities to perform due diligence.

The report said the fact that 79% of family offices surveyed had not documented their due diligence process was concerning and could lead to an inconsistent assessment of various hedge funds.

Corgentum surveyed 120 single and multi family offices in the US, Europe and Asia, which had invested in hedge funds within the past five years.