The Impact of Global Market Trends on Family Office Investment Decisions

As the global economic landscape rapidly evolves, family offices must stay attuned to major market trends shaping the investment environment. Looking back at past market data with a focused lens, we can look ahead. From heightened global volatilities to shifting asset valuations and liquidity dynamics, adhering to static portfolios is increasingly risky.

The Volatility Challenge

Navigating market turbulence requires an ability to be nimble and adapt investment approaches as conditions change.

• The CBOE Volatility Index (VIX) hit an average of 25.8 in 2022, well above its long-term mean of around 19, signaling higher market stress.

• According to research by Campden Wealth, 78% of family offices adjusted their portfolios in 2022 in response to market volatility.

• Common volatility tactics include increasing cash/liquidity buffers, adjusting asset class exposures, and hedging strategies.

The changing rates environment is another major trend impacting family office decision-making is the rising interest rate cycle, reversing over a decade of ultra-low rates.

• The U.S. Federal Reserve raised its benchmark rate 7 times in 2022 to combat inflation, reaching a target range of 4.25% to 4.5%. Now, the Federal Reserve kept the target range for the federal funds rate unchanged at 5.25% to 5.5% during its May 2024 meeting.

• Higher rates impact borrowing costs, discount rates for asset valuations and fixed income opportunities.

• 35% of family offices are overweight fixed income assets compared to target allocations, per the Campden report.

Re-evaluating private markets with public equities facing volatility and private market valuations resetting, family offices are re-assessing private investment strategies:

• Venture and private equity deal values fell 37% and 12% respectively in 2022 versus 2021 levels, according to PitchBook data.

• However, 56% of family offices still expect to increase private equity allocations over the next 12 months.

• A focus on high quality and value opportunities is emerging, versus purely chasing growth.

"Family offices able to be patient with extended holding periods can find compelling investments by focusing on resilient business models at more rational entry points," said Scott Hauck of Legacy Capital Fund.

Prioritizing downside protections across asset classes, family offices are emphasizing defensive positioning and downside risk mitigation given uncertain conditions.

• According to the Campden report, hedging against inflation and market downturns became the top two portfolio priorities for 2022.

• Strategies like increasing cash reserves, adding uncorrelated alternative assets, and options-based hedging saw rising adoption.

While every downturn inevitably leads to new upside opportunities, proactively managing risks is crucial for preserving multigenerational wealth during volatile stretches.