How to Invest Like a Family Office

Investors Education
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A recent study by KKR highlighted that family offices, wealth management advisory firms for the very wealthy, are now, on average, allocating over half of their investment portfolios to alternative investments. This marks a notable increase, even from 2020 alternative investment levels.  In fact, EquityZen saw family office investments in private company secondaries grow 121% in 2023 versus the average over the three years prior1. What’s driving the trend? The desire to achieve outsized returns over a longer time horizon. This longer horizon often aligns with the investment timelines for private investments, which make up a large part of the alternative investment landscape. 

Like Family Offices, savvy individual investors are taking note and exploring how alternatives, and private investments in particular, can complement their own investment portfolios. Alternative investments have become the cornerstone of many family office portfolios, challenging the conventional wisdom of traditional asset allocation. These investments, which include private equity, hedge funds, real estate, and more, offer diversification benefits and the potential for higher returns. The increased allocation to alternatives reflects a growing recognition among family offices that these assets can act as a hedge against market volatility while generating consistent, long-term growth, especially in a volatile market environment. 

When it comes to the asset managers with which these family offices are investing , there is a focus on managers  with strong track records of investment returns. After a few years of lackluster performance in the private markets, this makes sense. Not all fund managers will be successful and picking the right managers can be just as important as picking the right investment strategy. Because of this asset managers with track records of success will be the beneficiaries of the capital flowing to the alternatives ecosystem. When it comes to private company investments in particular, platforms like EquityZen may benefit from a 10+ year track record of success in the private markets across both single company and multi-company investment strategies

So how should individual investors think about alternative investments for their own portfolios? By adopting some of the key principles that are core to many family office investment strategies. 

 


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Key Principles of Family Office Investment Strategies:

 

Diversification Across Asset Classes

Family offices are adept at spreading their investments across various asset classes to minimize risk and enhance returns. While alternative investments play a significant role, diversification extends to traditional assets like stocks and bonds as well. A study by UBS showed that the average family office surveyed invested in a mix of equities, fixed income, private equity, real estate, cash instruments, hedge funds, private debt, commodities, including gold and precious metals, and art. This echoes the diverse array of investments that EquityZen’s family office clients tend to hold. Such a wide range of asset classes helps these family offices build a balanced portfolio that can weather different market conditions.

 

Embracing Private Equity

Private equity has become a favored asset class for family offices, providing opportunities for substantial returns through investments in private companies. In fact, 29% of investments held by family offices surveyed were allocated to private investments and this number is growing. Forty-one percent cited plans to boost their allocations to private equity funds, and a third plan to put more money into direct private equity deals. These opportunities were traditionally reserved for institutional investors, but individual investor access to these investments is increasing thanks to private investment platforms. 

While it may be challenging for individuals to replicate the same level of access, there are opportunities to explore private investments through platforms like EquityZen, which grants accredited investors access to growing private companies with investment minimums as low as $10,000. By including a portion of private market investments in their portfolios, individual investors can tap into a unique asset class that has the potential for higher returns and lower correlation to public markets.

 

Long-Term Vision

Instead of speculating on short-term market movements, family offices prioritize long-term growth. Individual investors can adopt a similar mindset by dedicating capital they do not need in the near term to longer- term investments, like alternatives. When adopting this approach, patience and an ability to resist the urge to react impulsively to short-term market fluctuations is crucial. This mindset aligns with the family office philosophy of securing wealth for future generations and also benefits from the potentially higher returns that come with the illiquidity premium often associated with alternatives. Building a portfolio with a long-term perspective allows for the power of compounding to work its magic, potentially leading to significant returns over time. This is a core tenet of family office investment management.

 

Risk Management Strategies

The increased allocation to alternatives by family offices is not just about chasing returns; it's a deliberate move to manage risks effectively. Family offices embrace a nuanced approach to risk, combining different asset classes to create a resilient portfolio. They are adept at active risk management, employing strategies to protect and preserve capital. Individual investors can adopt a similar approach by incorporating risk management techniques into their investment plans. This may involve setting stop-loss orders, diversifying across sectors, and periodically rebalancing portfolios to maintain an optimal risk-return profile. Understanding and managing risk is crucial for long-term investment success for all investors.

 

As family offices strategically allocate a significant portion of their portfolios to alternative investments, individual investors can draw inspiration from their approach. While individuals may not have the vast resources of family offices, adopting some family office investment strategies can prove to be beneficial. Through smart diversification, embracing a long-term perspective, exploring opportunities in private markets, and active risk management investors can adopt a family office investment approach that leads to a robust and successful investment portfolio. After all, successful investing is not just about chasing returns; it's about building a resilient and adaptive portfolio that stands the test of time, ultimately driving wealth creation.

 


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Source:

1. EquityZen data, as of March 13, 2024

Disclaimer: Diversification does not assure a profit or protect against market loss.  Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments. There are inherent risks in pre-IPO investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and returns. Investors must be able to afford the loss of their entire investment.

 

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