But a growing number of prominent hedge funders are also quietly cordoning off private enclaves for themselves, often within their big-name firms. Eric Mindich, Dan Och and others have created what are known as single family offices - and not everyone is happy about it. Critics say managers should focus on their hedge funds and, in effect, eat their own cooking.

"I expect hedge fund managers to be 100 per cent invested in their hedge funds," said Karl Scheer, chief investment officer of the US$1.2 billion endowment at the University of Cincinnati. "I prefer that they're singularly focused in order to achieve the best results."

In some ways the managers are just following a basic rule of investing: diversify. But clients and regulators worry these one-member clubs could raise potential conflicts, ranging from who covers costs, to how investments might overlap or collide.

At the very least, the lines can get blurry. Table, for instance, invested in Sprout Pharmaceuticals, maker of the first pill to aid women's sex drive. No sooner was the drug approved in August than Sprout was acquired by Valeant Pharmaceuticals International, a firm that Ackman, from his perch at Pershing, had championed during a hostile-takeover showdown.

Family offices have been around since the days of John D. Rockefeller. But the business has exploded in an era of hyper-wealth on Wall Street, in Silicon Valley and beyond. Private equity titans such as Leon Black and David Bonderman have set them up, too. The firms handle all sorts of affairs, from taxes to philanthropy to maintaining homes.

"This is possibly a new era of family offices," said Jamie McLaughlin, an adviser to wealth management firms.

Ackman started Table four years ago so he could focus on managing Pershing, a source familiar with his thinking said. The family firm grew out of investments Ackman made with his father and now has a team of about five, including chief investment officer Greg Lyss, who worked for Ackman at his first fund; and president Andrea Markezin, who previously worked at the family office of the Sulzberger family, which controls .

In addition to Sprout, Ackman has invested in start-ups including Relationship Science, an online professional-networking firm; PlaySight Interactive, a tennis analytics company; and Nitrous, a cloud-computing firm. But most of Table's investments are in real estate.

Mindich, founder of Eton Park Capital Management, created Everblue Management in October last year. To run it, he hired Kerrie Juras Ferrentino, who previously worked with the family office of the Dolans, the New York clan behind Cablevision. It is unclear if Everblue has made any investments.

Och, who runs Och-Ziff Capital Management, set up his Willoughby Capital Management in 2009. It is run by Morgan Rutman, a former hedge fund manager. The chief investment officer, Mira Muhtadie, previously worked in private equity and oversees investments including venture capital and art.

Paul Tudor Jones has been diversifying beyond his Tudor Investment Corporation since the late 1980s. His Jones Family Office is run by Mikael Andren, who previously worked in private equity. The firm's investments include Singita, an eco-tourism company in Africa; Reykjavik Geothermal, an Icelandic clean-energy company; and trading firms Castleton Commodities and Engineers Gate.

Single family offices are even more loosely regulated than hedge funds, and there are few requirements about what they must disclose publicly. Some worry that these parallel operations could create conflicts.

What if a manager's family firm invests in a small company that grows into one in which the hedge fund wants to invest? In-house family offices, which share office space and amenities, are particularly irksome. Who pays expenses for research and support staff? Like Tudor, some of Jones's family-office ventures trade commodities and use computer-driven strategies.

Mindich's Everblue and the family office of Ray Dalio, who runs Bridgewater Associates, are housed in the same buildings as their funds. Like Ackman, Mindich and Dalio covered the costs of running their family firms, sources said.

By contrast, Och has put some distance - literally - between his New York fund and family office, which is based 50km north of the city in White Plains.

Spokesmen for Eton Park, Och-Ziff and Tudor declined to comment on the potential for conflicts between the two sides.

Regulators are taking note. The US Securities and Exchange Commission is trying to assess risks associated with the growth of family offices.

"Diversifying from the fund is not a problem, but we want to make sure that if there's an overlap of investments, it's disclosed in a timely manner to investors," said Jennifer Duggins, who co-runs the SEC's private funds unit.

Over at Pershing, Ackman disclosed his holding in Sprout on August 26, six days after Valeant said it was buying the company. In a report to clients, Ackman said the holding marked only the second time he had invested in a private firm that was subsequently bought by a company in which Pershing had a stake.

Ackman also said in the report that his hedge fund had strict policies governing potential conflicts. Employees were not allowed to invest in publicly traded equity or debt securities other than US Treasuries, money markets and municipal bonds. Nearly all employees had most of their liquid net worth tied up in Pershing funds, though they were not encouraged to put 100 per cent in, Ackman said.

"Employees that are 'overinvested' in the funds may lose the dispassionate economic rationality that is essential for sound investment judgment, particularly in times of market stress," Ackman wrote.

At Fortress Investment, four executives have family offices within the firm. One of them, Red Lion, handles the affairs of Michael Novogratz and another principal. Their staff became employees of Fortress three years ago, according to a filing.

The executives reimbursed Fortress for compensation, benefits and other expenses, spokesman Gordon Runte said. They were barred from investing in the same areas as their funds, unless they could show that their stakes had no impact on the funds, he said.

Ultimately, however, such steps may not be enough to eliminate all conflicts, real or perceived. Daniel Celeghin, a partner at Casey Quirk & Associates, which advises asset managers, said most investors trusted their money managers and did not check on potential conflicts.

"Managers self-police, so it largely comes down to trust," he said.

This article appeared in the South China Morning Post print edition as: Hedge fund diversification: rise of one-member clubs

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