In the world of wealth management, family offices play a crucial role. These specialized firms are dedicated to overseeing the growth and preservation of family wealth. Their primary task? To handle a family’s finances and invest wisely.
This isn’t just about making money grow; it’s about crafting strategies for long-term financial stability. But what exactly do they invest in? The range is broad, from private equity and hedge funds to venture capital and even real estate.
But there’s no one-size-fits-all approach. Each family office tailors its investments based on the unique needs and goals of their clients, always weighing the risks and potential returns. Here’s a closer look at the diverse world of family office investments.
What Family Offices Invest In
#1: Define an Investment Strategy
Generally, an investment strategy must be defined before a family office invests in specific products or asset categories. In discussion with the family, goals are established, risk tolerance is defined, and you may have an array of assets entertained, with clients guiding what they’re comfortable with versus what they are not.
#2: Cash Equivalents
A family office wants to ensure that some of a client’s wealth is always accessible. For this reason, investing in a cash equivalent account with a little interest overtop, such as a high-interest savings account, works. It may not net someone significant returns.
However, they always have a reserve of cash available when they need it most and in case of emergencies.
#3: Investing in Stocks and Bonds
Many family offices invest in publicly traded stocks and bonds. More than any other asset category, stocks and bonds often get the most attention as they generate income and assist with capital appreciation.
They are fairly reliable and can be used wisely with little risk involved. Family offices often rely on assets where the risk is as minimal as possible.
#4: Direct Real Estate Investing
A family office may advise clients to invest in real estate. Real estate is another incredibly smart investment tool, as the returns can be significant, and an investor does not need to do much to see those returns.
A family office may advise you to invest in commercial real estate, residential real estate, farmland, and even protected areas if/when it makes sense.
#5: Private Equity Funds
Private equity investing invests in companies not publicly traded or listed on the stock exchange. A family office can develop its portfolio in private companies, generating profits that are not widely known.
In the past, this has proven to be a very fruitful investment class, generating significant returns so long as the private companies invested are adequately managed and have good fundamentals.
#6: Hedge Funds
Hedge funds can be risky. A certain amount of risk tolerance is required from a client to get involved in hedge funds. However, the returns can also be high.
In a family office, hedge funds may be an investment asset clients entertain. However, as should any pooled investment vehicle, this must be approached tactfully and smartly.
#7: Exchange-Traded Funds
ETFs are similar to mutual funds. They are a collection of stocks, bonds, and other assets. ETFs differ from mutual funds, however, in that ETFs are traded on stock exchanges at market prices. They offer more stability than the average stock, although there are risks. A family office must be smart with the ETF they invest in, just like any other stock product.
#8: Alternative Investments
A family office simply wants to maintain and grow its clients’ wealth. This can lead to making non-traditional alternative investments, such as buying works of art, investing in fine wines, precious metals, accumulating collectibles in a specific category, and similar initiatives.
So long as the value grows and income can be accrued, it’s not uncommon for family offices to look at any type of investing.
#9: Commodities
A family office may look at the futures market and commodities, where an investor can hedge a financial stake against an asset rising or falling. These include precious metals, industrial metals, agricultural such as wheat and corn, livestock such as feeder cattle, and energy such as crude oil and natural gas.
Commodities can move sharply and abruptly. That said, there are occasionally big opportunities when a commodity has fallen in value to invest and reap rewards in the long term.
#10: Impact Investing
Impact investing is the act of investing in socially responsible companies or initiatives for both the purpose of generating a financial return and making a positive impact in some area of society. This often is eco-friendly, environmentally sustainable investing.
However, it can also support philanthropic and charitable causes that align with a family’s values and goals.
#11: Avoiding High-Risk Investing
Where family offices don’t often go is high-risk, high-volatility investing, such as cryptocurrency. While the returns on some of these assets can be extremely high, the volatility and lack of predictable trends make it difficult for any family office to recommend this strategy to a client.
High-volatility investing will likely lose wealth, so offices rarely entertain attempting to go in this direction.
Final Note
There you have it – some investment funds a family office can advise its clients to invest in. Their investment choices, ranging from private equity to real estate, are carefully selected to align with their client’s unique financial goals and risk preferences.
This tailored approach ensures not only the growth of wealth but also its sustainable management across generations.
