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A $ 6 trillion Family Office World fights the Archegos crackdown

(Bloomberg) – Archegos’ implosion presents thousands of secret family offices with the biggest challenge to their privacy in a decade. They won’t give up without a fight. Some lawmakers, regulators and consumer advocates are pushing to expose the inner workings of family offices, which are tightly detained and lightly regulated, yet manage an estimated $ 6 trillion for the ultra-rich worldwide. Changes advocated for the reform should result in US family offices registering as investment advisers and reporting publicly on a quarterly basis, as most other types of investment firms are required to do. such data could alert regulators, investors and other Wall Street players to hidden risks, but it could also reveal proprietary information to rivals. Those advocating for more regulation are optimistic that new Securities and Exchange Commission chairman Gary Gensler, who has a harsh reputation on Wall Street, will see things their way. “The rationale for the family office exemption is now clearly indefensible and we believe the SEC will soon change this,” said Dennis Kelleher, CEO of advocacy group Better Markets. what all investment firms, including family offices, must disclose about their holdings, Bloomberg reports. The new disclosures could relate to the derivatives positions of companies and the stocks they are shorting. Representatives from the family offices are pushing back. They say they are preparing for their biggest lobbying effort as they successfully avoided inclusion in tough new regulations after the 2008 financial crisis. Their strategy: insist that the Archegos family office setup was irrelevant to the implosion. “What Archegos did and the fact that they got into trouble had nothing to do with the structure of the family office,” said Brian Reardon, a lobbyist for the Private Investor. Coalition, which advocates for family offices in Washington. The collapse of Archegos Capital Management LP in late March, led by former hedge fund manager Bill Hwang, sparked the lobby skirmish. After Hwang was excluded from the hedge fund industry for insider trading, Hwang started a family office in 2013 and eventually acquired $ 200 million in approximately $ 20 billion in assets, leveraging a highly leveraged portfolio concentrated in a handful of stocks. Bill Hwang’s dueling lives on Wall Street The ensuing outbreak revealed that neither regulators nor brokers had any idea how big Archegos’ holdings had become. “The losses are huge,” said Andrew Park, senior policy analyst at Americans for Financial Reform. “But the biggest bang is that these losses all came from a company that no one was aware of until a few weeks ago.” His group has called on the SEC to investigate whether the family office registry exemption is causing “ blind spots. ” The major bank brokers who had to settle Archegos’ positions, including Morgan Stanley, Nomura Holdings Inc. and Credit Suisse Group AG, lost billions of dollars, leading some bank executives to argue for more scrutiny as well. “In all fairness, the transparency and lack of disclosure regarding those institutions is just different from that of the hedge fund institutions. And that’s something the SEC will definitely look into, ”said James Gorman, Morgan Stanley’s Chief Executive Officer in an April 16 earnings call. “Better information is always good to find out where potential problems might be.” Reardon of the Private Investor Coalition said his group plans to speak with the SEC, the Commodity Futures Trading Commission and lawmakers to argue why some of the disclosure advocates have also called Angelo Robles, founder of the Family Office Association, prepares for action. He said he plans to contact law firms and US senators if regulators take an aggressive stance on family offices. “The implications are likely to be more regulation of swaps,” said Robles, whose Greenwich, Connecticut group has more than 200 members worldwide, referring to the type of derivative that Archegos often uses. The banks have said they can absorb the losses, but the shock that a little-known family office could have such an effect serves as a rallying cry for supporters of Wall Street reforms. Better Markets’ Kelleher said he’s already pressured his case with SEC staff, arguing in part that more disclosure of family office sizes and positions could help prevent them from becoming a risk to the financial system. Lawmakers have also expressed interest. Ohio Democrat Sherrod Brown, who heads the Senate Banking Committee, has asked Archegos brokers to disclose information about their family office causes. register as an investment advisor. The rationale for the exemption is that they serve only one high net worth client who does not need the protections afforded to investors in other funds, and offices with less than $ 100 million in assets or those funds can prevent them from being regularly publish information. Offices that serve more family members must file their assets with the SEC, but can request and often receive an exemption that allows them to keep the filing confidential. even those reports, such as those from hedge funds and health insurance companies. funds usually contain only direct equity holdings and no derivatives positions, such as the total return swaps that led to Archegos’ demise. large banks brokered the share swaps for Archegos for a fee. Such swaps allowed the company to spend relatively small amounts – it essentially used borrowed money to build a huge portfolio – while keeping ownership of individual stocks hidden. and short positions, which would not necessarily compromise the privacy of family offices if they are still able to file confidential holdings with the SEC. The lack of disclosure has made it possible for some family offices to pursue similarly complex strategies without scrutiny. In the meantime, by complying with fewer regulations, it has led a number of hedge fund managers to convert their businesses into family offices. For example, BlueCrest Capital Management gave back money to investors in 2016 to focus on managing the wealth of its billionaire co-founder Michael Platt, his partners and employees. John Paulson said last year that he is turning his Paulson & Co. hedge fund into a family office, following a similar move by Leon Cooperman’s Omega Advisors. Family offices have grown tremendously this century, in part as a result of the rise of tech billionaires. More than 10,000 family offices worldwide manage the assets of a single family, at least half of which began this century, according to EY. A 2019 estimate by researcher Campden Wealth valued family office assets worldwide at nearly $ 6 trillion, more than the entire hedge fund industry. Since most families strictly monitor the size of their assets and very few public records are available to keep track of their assets, the exact figure may be higher or lower. It is rare for family offices to take as much risk as Archegos. But hedge funds that convert into family offices are more likely to maintain their trading strategies, which often use leveraged bets that can have a broader market effect. is to raise money from investors and eventually acquire other companies. Part of the Private Investor Coalition’s plan is to tell regulators they already have the tools they need to detect threats to the financial system, Reardon said. The SEC is in the process of implementing a long-delayed rule that requires all funds, including family offices, to privately disclose some of their derivative positions to the agency. In theory, that would have made it possible for the SEC to see what Archegos was doing, but Archegos’ requirement to register as an investment advisor would not have prevented the eruption, said Reardon, whose coalition was formed in 2009 to support the secure offices. When regulators take action against family offices in the US, some may decide to leave the country. “In reality, the typical single family office is a small team of highly mobile individuals,” said Keith Johnston, chief executive officer of SFO Alliance, a London-based investment club for single-family offices. “There is a danger that if they consider themselves to be over-regulated, they will simply move staff or corporate headquarters to those jurisdictions where they are not.” Visit us for more articles like this at bloomberg.com. business news source. © 2021 Bloomberg LP

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