Over the past two years, a number of prominent hedge fund managers have decided to return capital to outside investors and to restructure their businesses as family offices. In August 2010, Stanley Druckenmiller announced he was winding down Duquesne Capital Management LLC to create a family office to oversee some of his $2.8 billion fortune. In February 2011, Chris Shumway announced that he would return outside money invested in Shumway Capital Partners because of increased fund liquidity risks, and would focus on managing internal capital. In March 2011, Carl Icahn announced he would return money to outside investors and convert Icahn Associates into a family office, citing a desire not to disappoint investors should another financial crisis erupt. In July 2011, George Soros noted in an investor letter that he intended to return nearly $1 billion to outside investors and to convert Soros Fund Management into a family office, citing regulatory uncertainty as a key reason for his decision. In August 2011, Edward Perlman announced that he planned to return nearly $470 million to investors and to convert Scottwood Capital Management into a family office, citing increased risks in the credit markets and regulatory uncertainty. Many hedge fund managers cite the burdens associated with the heightened regulatory scrutiny facing hedge fund managers for their decision to restructure their businesses as family offices. As a result of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), many large fund managers that have historically been exempt from registration as investment advisers pursuant to the Investment Advisers Act of 1940 (Advisers Act) will need to register by March 30, 2012 unless an exemption or exclusion is available. While the Dodd-Frank Act mandated adviser registration for many advisers, it also provided several narrowly-tailored exemptions and exclusions, including an exclusion for family offices whereby family offices are not only exempt from registration as investment advisers, but also are excluded from the definition of an investment adviser altogether, which means that they are not subject to the Advisers Act. For a thorough description of the definition of a “family office” and related definitions, see “Developments in Family Office Regulation: Part Three
,” Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011). This article starts by providing a detailed catalog of the primary benefits of converting a hedge fund manager to a family office and the primary downsides of such a conversion. For managers who determine that the benefits outweigh the burdens, this article then provides a roadmap of the primary legal and practical mechanics involved in such a conversion. Moving to a family office structure implicates considerations well beyond law and business – considerations relating to legacy, family, time and life goals. Such considerations are beyond the purview of this or any other practical publication; rather, they are the province of deep thought, reflection, conversation and exploration. But for managers who have undertaken the hard analysis and determined that the family office structure fits their goals, this article provides a useful starting place for identifying the relevant issues and taking the first steps.