As alternative investments continue the march toward mainstream, and as institutional investors continue to increase allocations to the alternative space, more high-net-worth investors are opening their eyes to non-traditional asset classes. However, there is no “one-size-fits-all” way to approach high net worth investors, nor is there one common set of objectives.
For example, family offices – investment advisers who work solely with private family clients and thus are exempt from SEC registration under the Advisers Act – are a special breed of investor. Given the nature of family wealth, such investors tend to have a much more intimate relationship with their assets than, say, a pension or an endowment. The family knows how the wealth was created and who will be inheriting it. The family may be more concerned about leaving a legacy, preservation of capital, tax efficiency and “keeping the family name out of the paper” and less concerned about return versus benchmarks. Not to say that metrics are not important, but that business risk likely supersedes alpha.
Furthermore, the family office adviser has a tremendous stake in minimizing such business risks. Compared to a traditional adviser who may represent hundreds of clients, the family adviser is one disgruntled client away from needing to find a new line of work.
Leigh Faber is a veteran of the alternatives space, who has conducted over hundreds of due diligence reviews in her career on behalf of family offices. She has covered hedge funds, commodity trading advisors, private equity, venture capital, and other alternative investments. She spoke with John Lothian News editor-in-chief Jim Kharouf about the differences between family offices and other institutions when seeking an allocation to managed futures. The key, according to Faber, is education – on both sides. Managers must explain performance, investment strategy and risk in an easy-to-understand manner, and managers themselves must be sensitive to the nature of family office wealth and how objectives may differ from those of pensions and endowments.