Fact Sheet - How Unregulated Family Investment Funds Threaten to Sink the U.S. Economy

What Are Family Offices?

Powerful, family-controlled investment funds - widely known as “family offices” - remain a massive and dangerous loophole in the U.S. financial regulatory system, due to Congress’ failure to require them to report their size and leverage to regulators.

The one-two punch of massive size —family offices control some $6 trillion in assets— and zero oversight, combine to create dangerous systemic risk while also exacerbating existing economic inequality in America.

Requiring family offices to register with the Securities and Exchange Commission, and to report leverage and the offices’ positions would help ensure these invisible whales don’t sink the whole economy.

Read below for background on family offices and the loophole that allows them to control so much of our financial markets without any regulatory oversight:

Private Family Offices are Currently in the Regulatory Shadows

Congress carved out family offices from transparency measures the 2010 Dodd-Frank Act brought to hedge funds and private equity firms. Unlike these other private funds, family offices do not have to register with the SEC, file public reports on their positions, or report to the regulators details about the leverage they employ.

Family Offices Manage More Capital than Private Equity Firms

The more than 10,000 private family offices in the U.S. manage nearly $6 trillion dollars in assets. This is more money than all U.S. private equity firms together, which as of 2019 had $4.1 trillion in assets under management. This is despite private equity firms having far greater regulatory oversight under Dodd-Frank.

A Single Family Office, Archegos, Led to Over $10 Billion in Losses at Major Banks

The meltdown of Archegos Capital Management earlier this year showed the urgency of bringing transparency to family offices. Archegos began with $200 million in 2013, growing to a reported $20 billion through the use of derivatives and leverage extended by Too-Big-To-Fail banks the firm prime brokered with. The fallout caused over $10 billion in losses across some of the world’s largest banks.

The extreme leverage that large banks extended to Archegos exacerbated losses for the fund and large banks alike. This is precisely the situation the Federal Reserve warned about in its May 2020 Financial Stability Report, where it noted hedge fund leverage had “increased markedly” as “dealers have reportedly given preferential terms to their most-favored hedge fund clients.”

It’s clear from the Archegos fallout that large banks with prime brokerage operations are also extending leverage to family offices. The lack of transparency at family offices was also noted in the Fed’s 2021 Financial Stability report, where they pointed out these funds are “not subject to disclosing their size or leverage.” This opacity hampers both large banks’ ability to evaluate the riskiness of clients they prime broker with, and the ability of regulators like the SEC and the Fed to conduct oversight.

Tech Titans and the Ultra-Wealthy Use Family Offices to Exacerbate Inequality and Leverage Tax Advantages

Reporting by ProPublica found the 25 richest Americans pay little to no taxes thanks to the preferential treatment of investments in the tax code. Many of these billionaires are able to maximize these advantages by growing their wealth through family offices. As wealth inequality deepens, family offices thrive: A 2016 EY Global Family Business Center of Excellence report noted that the “increasing concentration of wealth held by very wealthy families and rising globalization are fueling” the growth of family offices.

Family offices owned by tech titans raise particular concerns of systemic risk given their size and concentration of investments. Amazon founder Jeff Bezos’ family office, Bezos Expeditions, is estimated to have over $200 billion in assets— ten times larger than Archegos was at its most leveraged. Microsoft founder Bill Gates’ family office, Cascade Investment, L.L.C., has amassed the largest private ownership of farmland in the United States: 269,000 acres of farmland.

Family Offices Are Moving Into the Volatile Cryptocurrency Markets

Family offices are also emerging as significant investors in cryptocurrency hedge funds. Assets under managers in cryptocurrency funds reached $36.9 billion in July 2021, while a 2020 report by PwC found that nearly half of all investors in these crypto private funds are family offices. These investments are of particular concern given the high degree of leverage available in the cryptocurrency markets, combined with its extreme volatility.