Family offices want better returns than asset managers, but do they achieve them?

Photo by AUDINDesign/iStock / Getty Images
Photo by AUDINDesign/iStock / Getty Images

New research shows that single-family offices want better returns than other asset managers as they seek to maximize their nimbleness. But it is questionable whether they are actually achieving high rate of returns.

Single-family offices typically have an annual targeted rate of return of 13%, compared with 11.3% for multi-family offices, according to a survey by Peltz International, a New York City-based research group. Peltz’s data is for US family offices. This targeted rate of return for all family offices is ambition, given recent trends in public markets.

Here’s some performance data from public markets to show just how ambitious their targeted returns are. The annualised rate of return of the S&P 500 from 2007 until the end of 2015 was 7.2%, and the US treasury bond over the same period was 8.3%. In the three year period from 2012 until the end of 2015, the average return of all hedge funds, excluding fund of funds, was 5.5%, with 2013 achieving a return of just 2.8% and an even worse 0.04% in 2014. This year looks like it will be another terrible year for hedge fund performance, with the first five months achieving an average return of just 0.08%.

So, looking at some of the main indicators of investment performance suggests any family offices achieving double-digit annual returns is doing exceptionally well. Of course, investment officers aren’t all placing their money in funds tracking the S&P 500 and treasuries. Some are no doubt achieving double digit returns with a much more nimble approach to investing than your typically asset manager. Many private equity investments are achieving double digit returns, and there is more than enough evidence to show family offices piling into non-public markets.

But in a low return environment, to achieve a rate of return of anything more than 10% a year over a consistent period is pretty good. This is especially the case that one of the other Peltz findings was that family offices had wealth preservation as their primary investment goal - so, supposably they’re not taking too many risks.

Possibly the explanation lies with returns being made in non-public markets - how else would double-digit returns be maintained? Or perhaps they’re a figment of the imagination of the family offices reporting these rates of return. With family offices under no obligation to report verified returns we may never know.

The Peltz report also reported on other trends among US family offices:

  • Hedge funds typically comprise around 11% of portfolios of family offices (multi- and single-family offices).
  • The typical family office has been in existence 17.4 years, with the range from three years to 85 years.
  • Almost-one-quarter of those surveyed co-invest with other families, and another 19% said they share ideas with other families but do not co-invest.