Family offices kept shrinking their cash piles this spring and used that money to invest across asset classes, according to Citi Private Bank’s quarterly report on the holdings of more than 1,200 single family offices that it counts as clients.
As inflation steadily rose in 2021 and 2022, and the Federal Reserve raised its target interest rate to counter that, family offices and other investors sold equities and invested more in fixed income, or sat on their cash. In 2023, as inflation began falling, family offices started cautiously reinvesting those war chests (the average family office portfolio had 12 percent in cash or equivalents in 2023) and Citi’s latest report shows that trend is continuing. All of the respondents had a net worth of at least $250 million but many are worth much more.
While risk assets rose in the second quarter, family offices broadly continued to spend cash to allocate more to fixed income, equities, and to hedge funds, according to Citi’s latest survey. Family office fixed income flows were mixed across all four global regions with no clear preference. Meanwhile, their equity allocations tilted toward developed large cap companies. Offices in all regions except North America shrunk their allocations to small and mid cap stocks. Respondents’ exposures to emerging market stocks were down or flat.
There was little activity related to commodities, an asset class that accounts for just a sliver (1 percent) of their portfolios.
Family offices, unlike institutional investors, also slightly expanded their hedge fund allocations. Globally as of June 30, family offices had an average equal-weighted allocation to hedge funds of 3.1 percent, up about 30 basis points quarter-over-quarter (allocations were up in all regions except Latin America). The same trend was mixed among the largest family offices, some of which have portfolios with billions of dollars in assets, the Citi report said.
In a June survey by Preqin of institutional investors, most said they were shrinking their hedge fund allocations or deferring investing new money with them until 2025. Eighteen percent of institutions planned to expand their hedge fund positions and 47 percent planned to keep their allocations. But 35 percent planned to decrease their allocations, up from 25 percent last year.
The different attitudes about hedge funds — at least at the start of the summer — aren’t a signal of family offices getting something right or wrong, Richard Weintraub, head of the family office group for the Americas at Citi Private Bank, told Institutional Investor.
One reason for the changes could simply be that family offices are more nimble than institutions and able to put money to work faster than institutional investors. The coming fall season includes the prospect of Fed rate cuts, a U.S. presidential election, and continuing geopolitical conflicts, all potentially causing or contributing to higher market volatility. Family offices have been more interested in global macro hedge funds that can perform well in that environment and can make allocations before then. But the window before those events could be too tight for institutional investors, who are instead waiting until 2025 to choose hedge funds strategies, Weintraub explained.
Big picture: family offices investing a little more in hedge funds earlier this year is a “blip on the radar” Weintraub said. Other trends, like the continued expansion of alternative investment allocations beyond 50 percent of family office portfolios, including private equity, private credit and infrastructure, are the bigger story.
“We shall, of course, be closely watching how these moves play out over the coming quarters,” the Citi report said.
