To many managers and advisors, family offices (FOs) represent an elusive category of investors operating within a fragmented and secretive space. What’s for certain, however, is that the family office landscape is evolving, with offices growing at an ever-increasing rate and offering services ranging from investment management to tax and estate planning. Below are some noteworthy trends reflecting a growth in the prevalence of the family office model as well as an increasing focus on certain allocation strategies.
Growth in Family Offices
As global private wealth and the number of ultra-high-net-worth individuals are proliferating, so too are single and multi-family offices. The global population of ultra-high-net-worth individuals grew by almost 5,200 in 2014 according to data compiled by analyst firm WealthInsight. The study forecasts a 34% increase in this number from 2014 to 2024. The family office model is an appealing structure for both new and old members of the ultra-wealthy since it provides increased oversight of employed professionals and the money they control.
Embracing Multi-Asset Strategies
As stated in previous posts, alternative investments are highly illiquid and can take upwards of 10 years to realize returns. Despite the perceived challenges of investing in alternatives, these assets have the potential to enhance returns and provide an illiquidity premium. A portfolio that incorporates an asset allocation to alternatives has the additional benefits of potentially diversifying risk exposures and cushioning market volatility.
Family offices can afford the high illiquidity associated with alternatives, and many are adopting strategies that diversify beyond traditional assets and provide predictable growth during times of volatility. A 2014 survey conducted by eVestment, for instance, reported that 60% of FO responders planned to increase allocations to hedge funds over the next two years. This is consistent with wealth preservation and succession being key drivers of family office investment decisions. Family offices that are incorporating alternatives will often outsource investment management to professionals with structured strategies and expertise within these fields.
Accenture estimates that over the next several decades, baby boomers will pass $30 TN in assets to their millennial heirs. The next generation of investors – wealthy millennials – consider impact a critical investment factor, and many family offices are adopting this value-driven approach in anticipation of intergenerational wealth transfer. According to a 2013 Financial Times survey, family offices active in impact investing cited succession planning, alignment of family values, and contribution to a sustainable economy as top reasons for impact investing. The same survey reports that family offices allocated on average 17% of their assets under management to impact investments. In 10 years, impact investing should not be regarded as a nice-to-have niche.
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