UBS Group AG’s family office clients have increased allocations to hedge funds as they focus on active ways of managing their money to help navigate the shifting macroeconomic landscape.
Investment firms for the world’s super-rich had 7% of their portfolios allocated to the sector on average last year, almost double from 2021, the Swiss bank said Wednesday in a report.
Half of the 230 family offices that responded to the recent survey invested in hedge funds — compared with 43% the year before — with almost three-quarters saying they expect them to meet or exceed performance targets in the next 12 months. Global macro, multi-strategy and long/short equity funds were the most popular strategies.
“This is a very good way to diversify portfolios,” George Athanasopoulos, UBS’s head of global family and institutional wealth, said in a video interview. “That’s why we’ve seen moves into that space.”
About 38% of the poll respondents said they plan to boost allocations to fixed income in developed markets over the next five years, while a similar percentage intends to increase bets on direct private equity deals.
The world’s ultra-wealthy are rapidly reshaping their portfolios to take advantage of heightened volatility resulting from surging inflation and rising interest rates.
Family offices and other investors soured on hedge funds in the previous era of record-low interest rates, bemoaning high fees and lackluster returns. But some money managers in the sector picked up big gains.
Said Haidar’s namesake firm produced a 193% return in 2022, through it has struggled in 2023 as wild bond markets rocked macro traders. Greg Coffey’s Kirkoswald added a fourth year of double-digit returns in 2022.
“The hedge-fund managers that already were well established and have that proven track record continue to see very strong demand,” Maximilian Kunkel, chief investment officer for UBS’s global family and institutional wealth division, said in the interview. “There’s also demand for differentiating, somewhat more niche, new managers.”
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Family offices have proliferated in recent years as discrete managers for the investments, tax affairs and often lifestyles of the wealthy. While the Rockefellers set up one of the earliest versions in the 1800s and European dynasties were early adopters, their number has rocketed over the past two decades with fortunes booming in technology, finance and real estate.
The firms surveyed by UBS listed geopolitics and the possibility of a recession as their two biggest concerns for the next three years, with inflation — the top worry in 2022 — dropping to third. While they still have almost half their assets in North America, family offices said they’re looking to broaden their investments geographically, with more than a quarter intending to increase allocations to western Europe in the next five years and about a third planning the same for Asia Pacific.
Roughly a third of respondents — which oversee an average of $900 million in assets — said they’re relying more on selections by investment managers to support their diversification efforts.
“We’re in an era of non-zero rates, and we’re not going back to zero anytime soon,” Athanasopoulos said. “There’s a lot more dispersion of returns across different opportunities, so being able to generate alpha through areas where one doesn’t necessarily have that skill set is still important.”
--With assistance from Nishant Kumar.
