The Economist: How private investment companies 0.001% of the richest people in the world change the global finance industry
The global financial industry is undergoing major changes. The richest people on the planet continue to grow rich and reduce their costs by creating so-called "family offices", personal investment firms that are looking for opportunities to invest around the world.
According to The Economist, under such offices there are assets worth $ 4 trillion, which is more than all the hedge funds in the world control and makes up about 6% of the world stock markets. Journalists have studied these organizations and how they affect the growth of inequality in society and the creation of distortions in the global economy.
How things are arranged
The concept of family offices is not new - as early as 1882, John Rockefeller organized this. But the explosive growth of this form of investment management occurred already in the 21st century. Today, 5-10 thousand of these offices are located in America, Europe and Asian hubs like Singapore and Hong Kong.
The main task of employees of family offices is the management of financial assets. In some organizations, there are hundreds of people who take on a variety of tasks to serve the interests of the owners - including tax optimization, legal and transportation services (searching and booking private jets).
Such firms employ expensive specialists, and the total cost of ownership of a family office is so high that it only benefits people with a fortune of $ 100 million. For example, Alibaba founder Jack Ma has his own family office for investment, and George Soros’s organization is the largest.
Why do family offices grow
Each investment boom reflects the structure of the society in which it takes place. For example, in the United States, the growth of mutual funds (similar to Russian mutual investment funds, mutual funds) occurred in the 70s of the last century — this was the time of the prosperity of the American middle class, whose representatives satisfied basic needs and thought about investments.
Similarly, the increase in the number of family offices reflects the progressive level of inequality in the world. Since 1980, the total percentage of global assets, controlled by 0.01% of the richest people, has grown from 3% to 8%. There are no signs of this trend changing in the future - in 2018, Forbes magazine counted 259 new billionaires.
How does all this affect the global economy?
There are a number of concerns about the possible negative impact of rich family offices on the global economy. They own so large assets that, theoretically, their actions can lead to shocks. Something similar has already happened - in 1998 the hedge fund ltcm created for billionaires went bankrupt. Its initial volume was $ 100 billion, and this bankruptcy caused serious upheavals on Wall Street.
In 2008, the Ponzi-scheme of Bernie Meidof, built on the principle of a financial pyramid, was exposed, which was trusted by very rich people.
At the same time, the fact that the rich usually invest in long periods of time, and therefore less susceptible to panic and emotions typical of other market players, including banks and hedge funds, speaks against these fears. In addition, they do not make sense to get into large debts - now the total debt of family offices does not exceed 17% of their assets, which makes them one of the least indebted market participants.
The second concern is that the richest people can use their assets to seize control of the economy in certain regions. For example, if Bill Gates decided to invest exclusively in Turkey, then in the shortest possible time he would have control over 65% of the stock market of this country. On the other hand, investments tend to diversify, and this approach is contrary to this principle.
Most of all, experts are concerned that family offices can in some way get privileged access to financial information and tax schemes that will always allow replay of other investors. At the same time, so far there is no evidence of anything like this, and the average profitability of family offices in 2017 was 16%, and in 2016 - generally 7%, which is lower than the growth rates of global stock markets.
Conclusion: how can ordinary people compete with the richest market players
Despite the fact that the richest people in the world can afford to create investment firms that will look for profitable opportunities for them to invest around the world, this does not mean that other players do not have the opportunity to make money on the stock exchange and protect their assets.
The development of technology gives ordinary investors more and more opportunities to compete even with the largest participants. For example, tools such as robotic technology , model portfolios and structural productsallow you to create flexible financial strategies with a given level of risk and profitability. As a result, investors can earn more than the percentage of the deposit in the bank, while protecting their assets from sudden market fluctuations caused by the actions of its richest players.
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