Nowadays, family offices in the United States have a history of over a hundred years.
In 1838, the House of Morgan was established, marking the emergence of the first single-family office that strictly served one family. In 1882, Rockefeller established the Rockefeller family office.
As seasoned “butlers” for billionaires, the importance of family offices is self-evident. So, what are the characteristics of the mature family offices in Europe and America that have a century of practical experience? And how do they allocate their assets?
The structure of each family office depends on a variety of factors, including the size of the family, the size of the staff, and the nature of the family’s investments. Different organizational structures also vary greatly, making it difficult to summarize a systematic classification.
Some single-family offices focus mainly on financial investments, do not seek external financing for the time being, and do not have an organizational structure such as an IC (Investment Decision Committee) composed of external directors.
A single-family office indicates the service and management of a family’s asset allocation needs.
Financial investment is the main focus, indicating that the investment strategy and actions are more market-oriented. The layout in the investment portfolio does not take the synergy with the family business as the primary or sole criterion for measurement.
There is no external financing for the time being, indicating that there is currently no management of assets outside the family in any form.
There is no organizational structure such as an Investment Committee (IC) composed of external directors, indicating that the investment team is the IC, and the final investment decisions are made by the investment team.
01 Management and decision-making mechanism
The first three points are relatively easy to understand, so let’s focus on the last point.
In some family offices/institutions with an Investment Committee (IC) board, many asset allocation institutions will hire some industry veterans or well-known figures in society to form the IC. The investment team needs to cooperate with the operational due diligence team to provide the IC with complete and detailed investment recommendations. Finally, it is up to the IC to decide whether to implement the investment.
In investment decision-making, to avoid unnecessary waste of due diligence resources as much as possible, there is a greater emphasis on pre-investment discussions, and the communication and project initiation process is also more straightforward. Through frequent pre-investment discussions, the threshold is raised, and the decision-making node for project decisions is advanced, which also greatly improves the utilization rate of resources and the success rate of investments.
During the discussion process, if there are disagreements, everyone will put their doubts on the table for direct and open discussion, and listen to different opinions from each other. The reason for the discussion is to strive to clarify the issues and be responsible for their own investment.
In the final project approval, the main focus is on the number of votes. If more than half of the people vote against a project, and the CIO votes in favor, the CIO will not force a change to a favorable vote just because they have decision-making power.
For American family offices, respect for professionalism and trust based on professionalism is very important. It depends on the understanding and recognition of each other’s work processes, work rhythms, investment capabilities, and other aspects among family office members.
In addition, this trust is not only present within family offices but also among Institutional Allocators. A circle has formed between family offices in the United States and other asset allocators.
In this circle, everyone maintains a relatively transparent state of information. Practitioners often share information with each other and engage in professional investment discussions together. The Compare Notes between each other is a very healthy way of sharing information.
Mature family offices in the United States are generally financial investors.
In terms of asset allocation, they do not set a fixed asset allocation ratio, but instead, they conduct a quantitative allocation analysis based on the level of investment risk tolerance and the family’s wishes. They will specify a general allocation direction according to the liquidity of different asset categories and the risk-return ratio.
Generally, they will set a risk tolerance expectation at the portfolio level and determine absolute and relative return targets based on the risk expectation. Subsequently, they will determine the asset allocation ratio based on this return target and risk expectation.
Usually, there will be a major asset strategy adjustment every 3-5 years, while others will be fine-tuned according to market conditions.
Generally, attention will be paid to several long-term favored asset categories or strategy categories, and continuous learning, due diligence, and investment will be carried out. For other asset categories and strategies, the main work is maintenance and adjustment. These maintenances are mainly reflected in post-investment, such as timely portfolio adjustments, timely reduction or exit of funds with poor quarterly performance, etc.
Overall, the United States has a wide range of asset categories. Most single-family offices track 4 major asset classes and 21 sub-asset classes, so there is a lot of macro information to pay attention to, there are many investment strategies to learn, and there are also many funds to track.
The result of this work is a lot of diversity in the sources of returns. This can maximize the diversification of investment risks and increase returns.
In contrast, in China, some of the more mainstream asset categories are very concentrated, the sources of returns are quite close, and the correlation of returns is also very high. For example, everyone’s money has rushed into the venture capital of the primary market, this sub-asset category.
02 Asset allocation strategy
In a few years, due to the amount of capital exceeding the demand for high-quality projects, it leads to in-fighting within the industry, making both LPs and GPs unhappy. In this situation, it is also easier to breed unhealthy competition and investment distortion.
How to achieve differentiated investment like the United States is a lesson that Chinese investors need to learn.
From the perspective of the fund, primary funds emphasize the process of personalized deal sourcing; while secondary funds focus on providing a product tailored to specific return targets. Therefore, fund practitioners need to analyze themselves, find their strengths, and thus provide a sustainable return framework.
For LPs, it is important not to overly trust the concentration of top players and to maintain a mindset that is not FOMO (fear of missing out) in order to find the most suitable GPs among many.
Of course, due to differences in national conditions and capital market environments, as well as the scarcity of investable asset categories and high-quality targets domestically, many people are very afraid of making mistakes or failing. This leads to a high degree of repetitiveness in their efforts and an incorrect direction. Not only GPs, but also investors including LPs, are prone to getting caught up in the process of chasing high returns and finding it difficult to extricate themselves.
Additionally, some investors may turn to foreign targets to escape the “involution,” but there are certain risks involved. Please ask LPs and GPs to remain cautious about overseas investments, and avoid being taken advantage of due to chasing big names, following trends, and being blind. Before investing, investors must carefully assess the risks. This is because overseas asset allocation requires a high level of financial strength and investment expertise. When allocating assets, it is important to consider one’s own situation and not to blindly follow trends.
03 The U.S. family office asset investment categories are more abundant
When it comes to selecting a fund manager, we have a few insights:
Firstly, don’t overemphasize the extremely high returns of a fund during a certain historical period or a specific project. This is because what we are investing in is a fund, a team. The duration of our investment far exceeds the life cycle of any historical period or project.
For example, a hedge fund with an annualized return of 50%. We need to consider what time and environment this 50% return was achieved in? What was the volatility like? We also need to think about whether it can replicate this return in the future? When is it suitable to invest in it? How should we hold our position after investing? What position size should we allocate? How should we consider increasing our investment and exiting? What is the impact on the overall portfolio?
Secondly, a GP worthy of our long-term cooperation should be diligent, highly professional, and have their own unique insights. They should be sincere and transparent to the LPs, and have good communication. In the current poor market environment, all LPs will cooperate more closely with some trusted GPs.
So, how is this trust established? Before investing, we should have a comprehensive understanding of the character, personality, investment philosophy, and capabilities of the fund manager, and the process of understanding is also the process of gradually establishing trust.
Establishing trust is a gradual process, while destroying trust only takes once. As LPs, we can also understand some things through ODD (operational due diligence), LDD (legal due diligence), and reference (to notes).
It is worth noting that in the United States, judgment of people is a very important part of investment. For example, a U.S. fund manager who specializes in global macro strategy has started four businesses in a row. Whenever the fund’s performance was poor, he would liquidate the entire fund. In 2021, although his new fund performed very well, people in the industry who knew about his character avoided him.
In short, trust and character are what you pay for in terms of the cost and time of trial and error.
Secondly, investing is risky, and LPs should prepare for risk control in advance. An important step in doing a good job of risk control is to do due diligence. Adequate due diligence can reduce the likelihood of low-probability events. Don’t buy a big lesson because of a little laziness. Low-probability events are hard to avoid, what we can do is to reduce the probability of occurrence and control the cost of risk.
Family offices all hope to find a fund that can be invested in indefinitely. However, due to various reasons, they may withdraw their investment in a fund. In terms of withdrawal, there are several principles:
Firstly, decisiveness is key. If you want to withdraw, don’t hesitate and don’t have any concerns. Withdraw when necessary.
Secondly, it is important to reasonably determine and manage expectations for the investment, and to establish quantitative and qualitative standards in advance.
From the LP’s perspective, we need to establish a reasonable expectation for the returns of a fund, in order to form a relatively fair understanding of the future.
When a GP performs poorly, the first thing we need to look at is whether it has met our expectations. If it has met the expectations, then we may need to analyze from a portfolio allocation perspective whether there are any issues with the allocation of such assets. Here is a simple example: if a European hedge fund performs poorly absolutely, but performs far better than the European stock index, then as an allocator, I need to consider whether I should allocate European stocks or not.
04 How to choose a fund manager?
When it does not meet expectations, even if its absolute performance is good, we also need to judge whether the problem this time has affected our trust in this GP. If it is affected, we will withdraw decisively.
Third, as an asset allocator, one should not have illusions and emotions about any investment strategy or asset, nor should one have FOMO (Fear of Missing Out).
There is a saying, “Do not marry to a position,” which means do not be “kidnapped” by your investment, and withdraw when necessary.
Be a long-term investor and exercise restraint against the mentality of making quick money by following trends and chasing high profits. Be vigilant about large positions that may affect your judgment and logic, and avoid being overly aggressive or following the crowd.
Note: The above content and views are for reference only and do not represent any position of our company. They do not constitute investment advice. Please treat them with caution.
