For the modern family office, the need to preserve past generations’ achievements for future generations’ benefit makes the need for capital preservation strategies immediate.
Encouraged by their experiences with foundations and endowments, trustees have broadened the family office investment universe to include absolute return strategies. Encompassing a wide range of strategies, absolute return has come to refer to investment approaches designed to deliver positive performance in all market environments, maintain low correlation to other asset classes and have lower downside risk than their relative return cousins.
However, investors have been lulled into a false sense of security about the risks inherent in absolute return strategies. Detailed manager research is needed to identify manager talent, the use or abuse of leverage and, finally, manager credibility. Hedge fund and private equity managers’ sales promises of absolute return sounded convincingly reassuring to family offices whose strategic asset allocation plans began to more and more resemble those of foundations and endowments.
What has happened to those promises?
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