Family Offices and the Shift Towards Alternative Asset Classes

Volatility is visible across public markets, and family offices are adjusting their investment portfolios by increasing exposure to alternative asset classes like private equity. This shift aims to enhance diversification and pursue differentiated return sources.

The Allure of Alternative Investments

While strategic allocations vary, family offices continue gravitating towards alternative investments for several key reasons:

Portfolio Diversification

• Alternatives provide return streams with lower correlations to public equities and bonds

• This can reduce overall portfolio volatility and provide downside protection

Potential for Higher Returns

• Alternative strategies like distressed debt, macro, and activist funds target alpha generation

• Private equity has historically outperformed public markets over longer holding periods

Access to Unique Opportunities

• Families can gain exposure to niche sectors, strategies and geographies

• Direct investments into operating companies allow hands-on governance roles

According to the Campden Wealth Global Family Office Report 2022:

• 72% of family offices invest in private equity currently

• 54% utilize hedge fund strategies within their portfolios

• 23% engage in direct lending and credit fund investments

Navigating the Illiquidity Premium

A key tradeoff inherent to many alternative investments is lower portfolio liquidity and longer lockup periods compared to public markets. However, family offices' multi-generational time horizons position them well to take advantage of the associated illiquidity premiums.

Due to their patient capital approach, family offices can capitalize on dislocated markets and scenarios where asset prices diverge from intrinsic value.

Alternative Asset Implementation

In building out alternative investment portfolios, top family offices utilize specialized advisory firms and funds of funds to gain diversified exposure guided by institutional-caliber due diligence and risk management.

Challenges still exist around areas like fee optimization, co-investment structures, and portfolio construction best practices. However, the growth trajectory of alternative allocations appears firmly upward as investors prepare for a prolonged environment of elevated volatility.

Looking ahead, experts forecast the proportion of family office assets deployed to alternative investments like private equity, hedge funds, real assets and private credit could reach over 50% for leading families by 2025.