Family offices allocate more to private debt, cut hedge fund exposure

As they seek higher returns, family offices appear to be allocating more of their assets to private debt funds as they cut back on buying hedge funds.

“Private debt now comprises a bigger part of our portfolio than hedge funds,” says a chief investment officer of a family office based in Europe, who agreed to be quoted on the grounds of anominity. “The other family offices I’ve spoken to have pretty much followed a similar path.”

We invest in hedge funds that do not chase asset under management volume, but performance through strategies that dare to be different

Private debt is effectively lending capital for middle-market companies provided by non-bank institutions. It comprises debt financing that comes mainly from institutional investors, such as funds and insurance companies, but not from banks. Investors receive returns from private market loans, which typically offer higher returns than public debt. 

This type of financing has grown rapidly in recent years as banks have cut their lending to mid-sized firms. And family offices have been big buyers of private debt funds. According to the alternative asset research group Preqin, family offices allocated around 11% of their portfolio to private debt, the highest level of any investor types.

But as family offices allocate more to private debt, they appear to be cutting back on hedge fund allocation. Another piece of research done earlier this year by the hedge fund research group Peltz International found that family offices were allocating around 11% of their portfolios to hedge funds. But in the past, allocations have been much higher, typically 20% to 25%. Family offices were among the first investors to buy into the hedge fund phenomenon and many of them made a lot of money from them. But after the financial crisis in 2008, some family offices began to get more sceptical of the investment class, and in many cases have cut back their allocations.

Although hedge funds might be less in favour with family offices than they have been in the past, most are sticking with the asset class, but getting more create with it.  “We invest in hedge funds that do not chase asset under management volume, but performance through strategies that dare to be different,” says a head of a billion-dollar-plus family investment group based in Europe.

“That said, at times they are not so ‘different’ after all, and can get caught by sudden shifts along with many other types of investments. To avoid this we increasingly take part when well-seasoned managers set up new strategies, thereby getting lower fees, and in some cases get involved with co-investment opportunities.”