Introduction:
Family offices, representing the world's super-rich, are increasingly turning to hedge funds as a means to actively manage their wealth in response to the evolving macroeconomic environment. According to UBS Group AG, these investment firms had an average allocation of 7% to hedge funds in their portfolios last year, almost double the figure from 2021. This shift in investment strategy reflects a desire for diversification and a response to heightened volatility resulting from surging inflation and rising interest rates. In this article, we will explore the reasons behind the growing interest in hedge funds, the most popular strategies employed, and the broader concerns and investment preferences of family offices.
Diversification and Performance Expectations:
Of the 230 family offices surveyed, half reported investing in hedge funds, a significant increase from the previous year's figure of 43%. Furthermore, nearly three-quarters of respondents expressed confidence that hedge funds would meet or exceed their performance targets in the next 12 months. Global macro, multi-strategy, and long/short equity funds emerged as the most favored strategies among these family offices. The appeal of hedge funds lies in their potential to diversify portfolios and provide an active approach to managing investments, enabling the super-rich to navigate the complexities of today's market.
Resurgence of Hedge Funds:
During a period of record-low interest rates, hedge funds faced criticism from family offices and other investors due to high fees and lackluster returns. However, certain hedge fund managers have demonstrated strong performance in recent years, which has rekindled interest in the sector. For instance, Said Haidar's hedge fund delivered a remarkable 193% return in 2022, while Greg Coffey's fund achieved double-digit returns for the fourth consecutive year. These success stories have contributed to the sustained demand for established managers with a proven track record. Additionally, there is growing interest in niche and differentiated strategies offered by emerging managers.
Changing Investment Preferences:
The surveyed family offices indicated their intentions to adjust their investment allocations in response to the shifting landscape. Approximately 38% of respondents plan to increase their exposure to fixed income investments in developed markets over the next five years, reflecting a desire for more stable returns. Similarly, a similar percentage expressed their intention to increase investments in direct private equity deals. The world's ultra-wealthy are proactively reshaping their portfolios to take advantage of opportunities arising from market volatility and changing economic conditions.
Concerns and Geographic Expansion:
Geopolitics and the possibility of a recession emerged as the two biggest concerns for family offices in the next three years, according to the UBS survey. Inflation, which was the top concern in 2022, ranked third in terms of worries. While family offices still maintain nearly half of their assets in North America, there is a growing appetite for geographic diversification. Over a quarter of respondents plan to increase their allocations to western Europe, and about a third have similar intentions for the Asia Pacific region over the next five years. This global expansion reflects a desire to capture investment opportunities beyond traditional markets.
Supporting Diversification Efforts:
To enhance diversification, family offices are increasingly relying on investment managers' expertise. About one-third of respondents stated that they are placing more emphasis on investment manager selections to achieve their diversification goals. In an era of non-zero interest rates, generating alpha and identifying attractive investment opportunities in various sectors becomes crucial for optimizing returns and managing risk effectively.
Conclusion:
As family offices seek to navigate the changing macroeconomic landscape, hedge funds have gained significant traction as a means of actively managing wealth. The desire for diversification, coupled with the potential for strong performance in a volatile market, has driven family offices to increase their allocations to hedge funds. While concerns such as geopolitics and the possibility of a recession persist, family offices are also expanding their investment horizons, looking to broaden their geographic reach. The collaboration between family offices and investment managers plays a vital role in supporting their diversification efforts and optimizing returns in an era of non-zero interest rates.
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