In light of potential inflection points across interest rates, inflation and economic growth, family offices are planning the biggest shifts in their strategic asset allocation in years, a new report finds.
They are raising the share of hedge funds in their portfolios and looking to add developed-market fixed income over the next five years. They are also planning to lift investments in emerging-market equities, following a perceived peak in the US dollar and the reopening of the Chinese economy, according to the UBS Global Family Office Report 2023.
There continues to be a strong trend among family offices towards using alternatives to help diversify a portfolio, but they are refocusing their allocations. Almost half of family offices in Asia-Pacific (46%) prefer hedge funds while only 33% globally prefer to use hedge funds to diversify. For family offices in Asia-Pacific, hedge fund allocations have risen to 5% from 3%.
“It’s the end of an era for low or negative nominal interest rates and the ample liquidity that followed the global financial crisis. Against that backdrop, our research shows that family offices are making major changes to ensure they’re positioned for growth and success,” says George Athanasopoulos, head of global family and institutional wealth and co-head of global markets at UBS.
“While current market and geopolitical trends have prompted a shift to liquid, short-dated fixed income, 66% of family offices still believe that illiquidity boosts returns in the long term and they're looking to further increase allocations to alternatives like hedge funds, private equity funds and private debt to further diversify their private markets allocations.”
Active management is back in favour with almost one third (34%) of Asia-Pacific family offices relying more on investment manager selection and active management to enhance diversification, according to the report. Family offices have confidence in hedge funds’ ability to generate investment returns, as monetary policy reduces excess financial liquidity and macroeconomic uncertainty persists.
In Asia-Pacific, 80% of family offices expect hedge funds to meet or exceed their performance targets over the next 12 months. Asia-Pacific family offices with private equity investments prefer to invest using funds (53%) as they typically deliver diversification and can allow family offices to enter markets where they do not have in-house expertise.
Within private equity investment, the top sectors that Asia-Pacific family offices are interested in are technology, healthcare, information and communications, real estate and rental leasing. Overall, 27% of Asia-Pacific family offices plan to raise private equity direct investments over the next five years.
As regional investment preferences shift, Asia-Pacific family offices still have 51% of their assets in Asia-Pacific (including Greater China) and 64% plan to raise this allocation in the next five years.
Globally, family offices are cautiously planning to cut real estate allocations in 2023, but over five years, 13% of Asia-Pacific family offices see themselves moving to higher allocations. This fits a picture of interest rates remaining high this year, with some softness in real estate prices, before easier money and lower valuations start to support the asset class once again.
Looking ahead to the next three years, family offices are most concerned about geopolitics, the report says. They appear less anxious about rising inflation, which was the top concern in 2022 but currently ranks third, after geopolitics and recession. Where they are based is a major factor, though. In the United States, recession is family offices’ greatest concern, while in Asia-Pacific and Europe geopolitics is the top worry.
The UBS report is based on a survey covering 230 single-family offices around the world, with an average total net worth of US$2.2 billion. In Asia-Pacific, 45 single-family offices participated in the survey.