Single-family offices may be distinctly vulnerable to the psychological impact of financial losses, warns a new briefing paper issued by the Family Office Council, a membership group for single-family offices.
The Briefing paper, Risk Gets Personal shows how family office executives worry risk tolerances agreed in a rising market, and based on long-term commitments, may prove fragile if the market turns. This is because the rationale for such long-term investments is that the time frame will see investors through short-to-medium term market volatility. But family office executives are concerned that unless the psychological impact of short-term losses has been properly stress-tested, the commitment to that strategy may prove illusory.
Family offices need to prepare for volatility and interest rates to return to normal
The paper, based on direct market insight from family office executives, demonstrates the family office perspective on investment risk is distinctive. Risk outlook is driven by the degree of involvement of the original wealth creators, investment time horizon and number of beneficiaries. Mature family offices tend to invest for the long term, especially as they are not required to satisfy external third parties that come with pre-determined exit timetables.
Risk expert Philip Higson of family office consulting firm Carlyon AG, and sponsor of the paper, said: “Family offices need to prepare for volatility and interest rates to return to normal. The issue is that no one knows how difficult this transition is going to be, as the US policymakers are projecting a steeper path than the markets for rate increases and the yield curve slope is sending a warning signal.”
The paper notes a benign environment with abnormally low rates, combined with family office preference for more control, continues to generate enthusiasm for relatively illiquid assets such as direct investments in private companies and private debt.
Keith Johnston is CEO of the London-based Family Office Council