Are alternative investments one of the keys to family office profitability?
By Don Wilkinson
DFW & Associates
In the minds of the ultra-wealthy, safety and capital conservation are first and foremost. So what’s the key to wealth preservation for family offices and their client base in these turbulent times?
If you’re wondering what’s on the minds of affluent candidates for family offices, wealth preservation is a priority. The wealth of such individuals and families is put at risk by the up and down gyrations of traditional equity and debt markets.
Essentially, there are a number of economic dimensions that have occurred during the recent volatility in the marketplace that affected the very rich. First, they have lost a portion of their wealth; then they’re confronted by increased taxes, estate law changes, currency devaluation, deflation, inflation, liberal confidentiality rulings, geopolitical upheaval, Wall Street scandals, etc.
In the minds of the ultra-wealthy, safety and capital conservation are first and foremost. So what’s the key to wealth preservation for family offices and their client base in these turbulent times? Greater asset diversification through alternative assets.
Moving the portfolio forward is essential for family office wealth creation, not only for the present situation of wealthy clients but for the transfer of wealth to their future generations.
More and more, this need for diversification is driving family office fiduciaries to actively seek out alternative investments such as private equity, hedge funds, real estate and collectables such as art. Navigating sophisticated and complicated yet rewarding asset classes can be difficult without the right information, advice and tools.
With the increasing complexity of wealth and the need to coordinate professional activities, the family office has evolved as a central advisory source. In fact, recent research by the Kass Family Group has concluded that out of a pool of affluent clients who resigned from their financial advisors, 40 percent would prefer to be a member of a family office.
Traditionally, the family office has retained traditional investment managers in mutual funds, separate managed accounts, ETFs, bonds, fixed income assets, administrating the majority of the family office’s portfolio.
However, for most family offices, utilizing traditional investing models is not enough. Not enough for a family office; especially the single model to achieve year in and year out profitability.
Many family offices prefer alternative investment managers to head hedge funds, managed futures, private equity and venture capital in order to use multiple types of investment strategies to achieve their returns. Lately, alternative investments often outperform the equities market, especially in down markets. Other areas of recent interest are timber, water resources and credit (debt).
Hedge funds and private equity firms are often used in family office portfolios with the hope of achieving a good risk adjusted return, or alpha. There are over 15,000 hedge fund and private equity funds in the world and their strategies are diverse and dynamic.
The very same advice family offices echo to their clients of diversifying their assets is key to firms’ profitability, even their survivability, during these rocky economic times. That may very well be true as another Kass study (151 FOs) concluded that 85 percent of family offices are committed to hedge funds, while 50 percent are in private equity investments, featuring pure alternative asset classes.