The Ideal Family Office Portfolio: Offense Wins Games but Defense Wins Championships
What investors seek when targeting diversification is macro variable diversification. Macro Variables: Growth, Recession, Inflation, Deflation.
Public & Private Equities perform best in growth; Bonds perform best in deflation; Commercial Real Estate and Commodity Trend Following strategies perform best in inflation; Long Volatility / Long Convexity (tail hedge) strategies and cash perform best in economic contraction.
Additionally, every investment falls into one of two simple categories: Stability seeking (Offense) or Instability or Dislocation seeking (Defense). Every portfolio needs both categories.
These All-Weather principles are the building blocks of any Family Office portfolio. Once a proper Family Office portfolio is implemented, it is simply a matter of tactically rebalancing when appropriate.
Defensive Investments:
Instability seeking (defensive) investments are one of the most critical components of a family office portfolio.
The defensive investments are like the 1st responders in your hometown. Markets appear quiet (stable) until a catastrophic event happens (regime change).
The Fire Department, Police Department, Ambulance services all respond when needed, and their efforts minimize loss. A portfolio with no defensive assets is akin to living in a town with no 1st responder services.
These are the investments that can provide gains and also offer liquidity in times of market turmoil. These investments can be liquidated in times of turmoil and then capital can be redeployed into stability seeking investments (commercial real estate, equities, private companies) at depressed prices.
The Goal of the Family Office Portfolio
Family offices like their wealth to be readily available whenever they would like to access it, without having to wait (hope) for a market recovery. This is achieved though the construction of an All-Weather portfolio that minimizes the risk of significant drawdowns.
Having liquidity available when others don’t is a huge advantage. Having a portfolio that has minimal or no drawdowns when others are down significantly offers the ability to capture opportunity.
This allows the family to be on offense while others are retreating and purchase valuable assets such as commercial real estate or companies at depressed values in times of turmoil. This is how generational wealth is not only maintained but is exponentially grown. Capitalizing on the poor investing strategies and over-leverage of others is an edge.
There will be future regime changes, and dislocations, and due to market microstructure today, they may be more severe than historical drawdowns.
Unique uncorrelated strategies and the ability to source best in class niche investment managers are an important component of a family office portfolio. Hedge funds, private equity & venture capital; real estate private equity, private credit & other alternative lending, trend following strategies, portfolio protection / tail hedging managers.
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