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Many wealthy families form their own private offices to manage their extensive assets. Family offices can be responsible for a wide range of financial duties from figuring taxes to transferring businesses among family members to developing philanthropic strategies.
But, in addition to overseeing and preserving assets, a family office can also seek to generate money by taking an institutional approach to investing. Family offices can grow family wealth from generation to generation through a diversified range of investments.
Alternative investments, such as hedge funds, private equity, and real estate, can be particularly essential to larger investors. They can provide necessary diversification of sizable portfolios by helping to decrease the risk associated with traditional investments, such as stocks and bonds. While institutions and high-net-worth individuals have traditionally sought out these types of investments to grow and protect their capital, the market performance of the last decade has brought greater prominence to these investors, as more and more investors amassed considerable wealth and gained access to the exclusive arena of alternative investing.
But not all investors can access these opportunities - only those individuals with significant wealth can meet the high-net-worth requirements to qualify - $5 million or more in investable assets net of liabilities - as well as the high minimum investment amounts. These barriers to entry exist for good reason. While investors can limit their market risk by using non-correlated alternative assets, they still face other kinds of risks that differ from that of traditional investments - risks that wealthier investors are more capable of assuming.
Alternative investments may use leverage or remain illiquid for long periods of time. Therefore, investors in these asset classes should have high-risk tolerance, low liquidity concerns, and long time horizons - for which they could potentially reap huge rewards.
Because alternative investments tend to be sophisticated instruments and require a discriminating understanding, family offices often seek outside expertise on the best ways to use them. In fact, a family office may outsource all investment management to independent advisory firms.
A family office can be structured any way the family wishes. The family decides which responsibilities the office should handle and which should be delegated to outside financial institutions and other advisors. With the family's consent, the family office may wish to outsource all of its functions to financial firms and other advisors - from estate and business succession planning to trust services to day-to-day administrative duties.
Outsourcing family office functions makes sense for many families because while they may have had great success in business, money management may not be their area of expertise or they may not have the time to do it effectively. Regardless of how the office is structured, alternative investments can be a crucial part of every wealthy family's asset allocation model. If part of a well-diversified portfolio, alternative investments can help to lower the risk associated with the market and may generate magnified returns. External advisors can help the family make the most of alternative investments with the goal of growing and protecting wealth well into the future.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.