
How the 0.001% invest - nikbackm
https://www.economist.com/leaders/2018/12/15/how-the-0001-invest
======
potatofarmer45
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.

~~~
mruts
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.

~~~
Gustomaximus
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.

~~~
savanaly
>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.

~~~
whatok
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.

~~~
Scoundreller
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.

------
jerrre
0.001% of the world is about 75k people [1], there are about 2200 dollar
billionaires [2], so only(!) ~3% of these people are billionaires.

Not a real point to make, but I was wondering, and it might save someone else
time.

[1]
[https://www.wolframalpha.com/input/?i=0.001%25+*+world+popul...](https://www.wolframalpha.com/input/?i=0.001%25+*+world+population)
[2]
[https://en.wikipedia.org/wiki/The_World%27s_Billionaires](https://en.wikipedia.org/wiki/The_World%27s_Billionaires)

~~~
emn13
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.

~~~
ascar
> 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.

~~~
code_duck
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.

~~~
joncrane
The point is that the vast majority of the wealth was generated after the
split.

~~~
EADGBE
Do people write about failed divided businesses?

------
dgudkov
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.

What's the point of the article?

~~~
jniedrauer
> 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.

~~~
dgudkov
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?

------
ThrustVectoring
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.

~~~
CompelTechnic
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.

~~~
sokoloff
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.

~~~
tanderson92
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.

~~~
Scoundreller
I thought you were only able to write-off $3k in capital losses per year
against income?

If so, not worth dealing with for a billionaire, but definitely an opportunity
for a middle-class robo-advisor.

~~~
sokoloff
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.

------
nly
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.

~~~
adventured
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.

~~~
hal-9-000
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.

~~~
j1vms
> Amazon is Jeff and Jeff is Amazon

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.

~~~
aczerepinski
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.

------
AdamJacobMuller
[http://archive.is/o3LVk](http://archive.is/o3LVk)

~~~
mlrtime
For people who don't like to click on random links, this is the article.

------
lordnacho
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).

~~~
peteretep
The SEC remedy against bad hedge fund owners in the show Billions is the
threat of turning them into family offices

~~~
thomas93
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.

------
Blackstone4
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.

~~~
mruts
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.

~~~
Blackstone4
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.

------
spyckie2
[https://en.wikipedia.org/wiki/The_World%27s_Billionaires](https://en.wikipedia.org/wiki/The_World%27s_Billionaires)

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.

------
benj111
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.

~~~
Moodles
> I'm not particularly convinced by the risks stated here.

Both of your points are made in the article?

~~~
benj111
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.

~~~
Semaphor
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.

------
blazespin
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%

~~~
comboy
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.

~~~
dx034
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.

------
known
"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

~~~
hippich
I guess depends on which 10 years you pick and whom you compare yourself with
- [https://www.portfoliovisualizer.com/backtest-
portfolio?s=y&t...](https://www.portfoliovisualizer.com/backtest-
portfolio?s=y&timePeriod=4&startYear=1998&firstMonth=1&endYear=2008&lastMonth=12&calendarAligned=true&endDate=12%2F16%2F2018&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=false&annualPercentage=0.0&frequency=4&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=SPY&allocation1_1=100&symbol2=SHY&allocation2_2=100)

------
mark_l_watson
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.

~~~
Klover
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.

Unless I remembered wrong. I read it on Thursday.

------
abledon
[removed fun fact due to it being false and still being published in modern
books .. sigh]

~~~
vmlinuz
Fun fact: This is not supported by historical evidence, and was likely simply
anti-Semitic fake news which got out of hand...
[https://www.independent.co.uk/news/uk/home-news/the-
rothschi...](https://www.independent.co.uk/news/uk/home-news/the-rothschild-
libel-why-has-it-taken-200-years-for-an-anti-semitic-slur-that-emerged-from-
the-10216101.html)

~~~
abledon
Haha! Well if its true that the parent fun fact is not true, its shocking
because I read that in a book[1] authored by Dan Cryan [2].

[1] [https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-
Cry...](https://www.amazon.ca/Introducing-Capitalism-Graphic-Dan-Cryan/) [2]
[https://technology.ihs.com/Biographies/400721/dan-
cryan](https://technology.ihs.com/Biographies/400721/dan-cryan)

~~~
lazyasciiart
The origins of the story are covered in reasonable depth on Wikipedia -
[https://en.m.wikipedia.org/wiki/Nathan_Mayer_Rothschild](https://en.m.wikipedia.org/wiki/Nathan_Mayer_Rothschild)

------
FatDrunknStupid
There's a lot more fragmentation than this suggests. I've worked at a hedge
fund that had exactly one investor for example.

------
LegendaryLegend
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.

------
lawrenceyan
Paywalled.

~~~
nikbackm
Using private browsing mode tends to work.

~~~
AdamJacobMuller
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](http://archive.is/o3LVk)) which is
quite reliable for me and 99% of the time someone else already archived it.

~~~
Semaphor
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.

~~~
icebraining
Are you using Cloudflare's DNS servers? Yeah, it doesn't work with that, for
some reason.

