Single Family Office Index Tracking: The Benefits

Authors: Richard Wilkie, Co-Founder LSP Partners, LLC and Ralph Vince, Co-Founder LSP Partners LLC

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SFO Index-Tracking: The Benefits

Presented is a method Single Family Offices (SFOs) might implement internally resulting in numerous benefits to the SFO. The method involves tracking a published “index,” usually comprised of equities. The implementation is performed essentially by clerical staff and thereby achieving professional results internally at minimal cost. Discussed herein is a further description of this process, procedures for implementation, and an enumeration of the many benefits of the index-tracking process. Additionally, an index of the Authors’ construction (specifically targeted to these ends) is presented.

Through necessary diversification, SFOs end up as a de facto index of their invested components, minus the deduction of heavy fees. At the typical fee structure of 2 & 20, a 10% return the first year with a given fund manager will cost the investor upwards of 356 basis points. Thus, a 10% return is reduced to a 6.44% return.

Contrast this with the typical fees on a self-implemented index of roughly one-tenth of the fees of this example. If one had been paying 10 basis points per quarter, one would have seen a gain of 316 basis points simply on fees alone. Versus a fund of funds, the gain by indexing is even greater.

Clearly, the easiest gain an investor can make is in the compression of fees. Self-implemented indexing is a mechanism to achieve this. If one can find an index to track that provides hedge fund style returns, the gains in fees accrue to the investor. The exercise then is to find the best performing indexes.

Our experience at the Abu Dhabi Investment Authority, the world’s largest Sovereign Wealth Fund (ADIA), was that successful hedge funds and CTAs either quickly accumulated assets and reached capacity limits thus closing to new investors, or failed to achieve critical mass in assets and were forced to close. The window of opportunity for investors to invest with the typical fund was only a handful of years. Indexing was an obvious alternative solution.

With only a handful of portfolio managers outperforming the broad indexes each year, it can only be a matter of time before indexing becomes mainstream (even notable economists like Burton Malkiel have proffered considerable academic justification buttressing the notion of the difficulty of outperforming the indexes longer-term).

The prime concerns for ADIA were: transparency, low fees, and performance. What we needed was not just an index, a benchmark index, but a better benchmark index – a benchmark index that could also rival hedge fund style returns.

This paper will address not only these issues but also the many other benefits of building and implementing an internal indexing operation for the Family Office

Benefits of SFO Index-Tracking Topics Covered

  • Conventional Indexes
  • Due Diligence
  • Benefits to the SFO
  • Index Implementation


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