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Risk and structured investments in family offices

Preserving wealth is one of the primary objectives of family offices, making risk management an important element of any investment products within their portfolios.

The amount of risk a family office is willing to take typically depends on how close the individuals are to wealth creation instead of inheritance. In other words, third-generation offices are more likely to be risk averse, while first- and second-generation institutions are usually inclined to grow further.

Regardless, downside protection remains a heavy focus for many family offices, which is why structured investments should be playing a larger part in their investment decisions.

Research by well-known French business university EDHEC claimed that despite the availability of a range of investment vehicles, many institutional investors were drastically affected by financial market downturns.

The report, released in 2005, said investors should be tailoring their portfolios more efficiently than simply relying on the linear exposure to returns on traditional asset classes.

“Our conclusion is that typical institutional investors, with a strict focus on risk management driven by the presence of liability constraints should optimally allocate a significant fraction of their portfolio to structured investment strategies,” the university recommended.

According to EDHEC, extremely risk-averse investors should have a structured investment value weighting of 70 to 90 per cent. Risk-seeking investors can instead replace bonds with structured investments to decrease shortfall risk exposure, with optimal allocations of between 10 and 70 per cent.

“In fact, only the most risk-seeking investors would have a zero allocation for a structured product and invest 100 per cent in stocks,” the institution added.

Despite this, Affinity Capital estimates most family offices have less than 3 per cent of their wealth focused on this asset class. This is counter-intuitive to their goal of preserving wealth through effective risk management.

Would you like to learn more about how structured investments can bring value to your family office portfolio? Please read our ‘Using financial WMDs to your family’s advantage’ whitepaper.

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