Family offices expect extreme volatility but remain bullish

Despite the multiple challenges and uncertainty in the months ahead, most family investors are optimistic about market performance

Family offices expect extreme volatility but remain bullish
Steve Randall

Family investors have found themselves at a turning point this year with record returns over the past two years replaced by the real possibility of a global recession.

But while as concerned as the rest of us about rising inflation and rates, a survey of family offices’ chief investment officers has found optimism for good things ahead.

The global poll by the Family Office Exchange (FOX) found that 93% of respondents expect high or very high volatility in 2022.

Despite that, sentiment is strong with 61% bullish about the markets in the year ahead and 44% expecting the economy to improve.

The survey also identified a continuation of the trend for increasing allocations to private equity (PE), venture capital (VC), and direct investments, rather than cash and hedge funds.   

Portfolio allocations to direct PE were up 5 percentage points year-over-year. These investments are attractive to family investors for their ability to deliver incremental returns and provide diversification from public markets.

These investments are also helping older family members to engage younger members with impact investments and other opportunities.

However, impact investing by family offices appears to be slowing, at least in terms of allocation.

A lack of measurable data is cited by respondents as a barrier for deeper engagement with impact investing, along with the expectation of market-rate returns which are often not met by these investments.

Investment plans

The survey shows that enterprise families and their family offices plan to overweight private equity (65% of respondents) and cash (44%), and underweight fixed income (68%).

The plan to shift funds from fixed income to PE is more prevalent among larger offices, with smaller ones more likely to park funds in cash.

Expectation is high, with most respondents looking to match market performance over the next two years, while one third are predicting that their investments will beat the markets.

Outsourcing expertise

FOX’s Global Investment Survey also revealed that just 13% of small family offices (7 or fewer employees) have in-house PE or VC expertise, compared to 59% of larger ones.

That means that smaller entities are more likely to seek outsourced expertise to help them leverage the potential of these private market investments.

They are also more likely to opt for real estate deals and to rely on family and friends for deal flow.

Larger offices are more likely to invest in private equity directly and via allocations from funds, brokers, and investment bankers to which they have access.