Years of cheap money meant that family offices tended to be more tactical, than strategic, in making portfolio decisions. They might have considered an allocation to that hedge fund or this venture deal, based on affinities and relationships. Keeping up with the latest trend by way of a pre-IPO investment, if even available, was essential. Our experience indicates that style is fast changing. More-and-more names are now disciplined and structured in their approaches, as cash-on-hand becomes a commodity in limited supply.
Channeling the Global Family Office Report 2023 published by UBS, accredited investors are building barbell strategies to manage overall portfolio risk. One side of the long bar is focused on short-term fixed income with its lower-risk characteristics; the other side is targeting alternatives with higher-return potential. They are avoiding the middle terrain because of lingering concerns about the global economy.
Major Global Risks, Two-Year Horizon
Droughts, hurricanes, and wildfires capture the headlines, with evidence pointing to the role of fossil fuels. Global agreements on net-zero are fleeting. Policymakers are increasingly confronted by perceived trade-offs between energy security, affordability. and sustainability.
The weaponization of economic policy between global powers has highlighted vulnerabilities posed by trade, financial, and technological interdependence. Unexpectedly, reputational and legal risks have grown for multinationals operating in certain markets.
Source: World Economic Forum
Framing portfolio activity among family offices is notoriously difficult because this investor segment is best known for opacity. Based on available information, we take a closer look at asset classes in calibration:
Fixed Income. The UBS report notes that more than a third of family offices are looking to invest in “high-quality, short-duration bonds for potential wealth protection, yield, and capital appreciation.” Those funds in part are being pulled from real-estate investments, given the shaky outlook for some property allocations. An important sub-component of the story is the role of often-illiquid private credit, where investors are risk-tolerant toward generous basis-point spreads over conventional debt.
Venture Capital. The story here has a broad spectrum, with UBS survey participants noting a particular focus on digital transformation, medical devices and health technology, as well as automation and robotics. We assume that their definition of digital transformation includes elements of artificial intelligence, although that is not specifically defined in the public report. This theme may be prominent because of the AI craze that started in December 2022 with the launch of ChatGPT, without regard to now-lofty valuations.
Hedge funds are part of the mix, but on a limited basis, given how investors have soured against the asset class because of performance and management-fee issues. They usually represent 5%-to-10% of the total family-office portfolio structure, with a bias toward global macro and multi-strategy funds.
That hedge-fund allocation is a signpost for overall portfolio objectives. Some of the best-performing hedge funds this year are long-short equity strategies, gaining around 7% in aggregate through July. Yet family-office investors seem to prefer global macro or multi-strategy choices because of the perception of prudent risk management. These broad approaches, offering only modest returns so far this year, are tethered to go-anywhere possibilities and well-diversified holdings.
Of course, family offices reflect the personalities and preferences of their owners. There are still flourishes in their investment portfolios. Luxury yachts—perhaps once belonging to Russians—are selling quickly at sharp discounts. The annual collector-car auction in Monterey, California, a Sotheby’s event, is abuzz. And the global diamond market is buoyant for iconic gemstones. ■
Our Vantage Point: Family offices are privileged investors because they typically have both well-funded investment accounts and the satisfaction of allocating over time without liability-matching constraints. That long-wave approach helps them to avoid unexpected events and cyclical pitfalls. Those concerns are a legacy of the pandemic.
Learn more at Barron’s
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