Rich Asian families did not make major changes to their portfolios following the 2008 crisis, but one thing they are doing is dialling down their exposure to hedge funds, said family office executives during a recent discussion hosted by AsianInvestor*.
This will be worrying for hedge fund managers, since wealthy individuals have traditionally formed a substantial part of their client base.
"The Asian financial crisis in 1997/1998 had a huge effect on our clients’ whole outlook,” says Audrey Lo, managing partner of Hong Kong-based multi-family office Alps Advisory. “This time, after 2008/9, it’s not as bad, as the base businesses have not suffered so much.
“They made little change to their long-term portfolios, apart from wanting to allocate less to hedge funds, because of unexpected issues such as gating.”
Independent family adviser AS Johan makes a similar point. “Very little has changed in the Middle East and Asia compared with the US, where there’s been this huge realisation and big depreciation in family wealth.
“The only thing I’ve seen is that clients don’t want to talk to many hedge-fund managers any more, and the typical structured products are being avoided.”
There’s also been a very drastic shift to two extremes, adds Hong Kong-based Johan. On one side, families are allocating a significant portion of wealth into very safe investments, such as sovereign bonds.
On the other, a smaller portion – say, 20% – is going into club deals, venture capital or private equity, which has a seemingly fairly high element of risk. But if the families know the business, they’re quite comfortable with that risk, says Johan.
The middle part, which used to be occupied by hedge funds and all sorts of equity funds, has disappeared, he notes. “My clients have said: ‘There’s no point wasting time with this. Let’s go for ultra-conservative and ultra-high-risk.’”
Hence, they have now migrated more into private equity products and away from hedge funds. “Many of the bigger hedge funds have almost become a commodity, so they don’t require as much due diligence,” he adds.
Family offices are certainly reducing hedge fund allocations, in line with similar moves by endowments, notes TK Chiang, managing partner of Hong Kong-based Orion Partners.
Yet while many families study the Swensen endowment model – which advocates a relatively large allocation to alternatives – few actually practise it, he says. For example, endowments are moving towards more real asset exposure, notes Chiang, but family offices don’t seem to be doing the same.
“Part of what gets in the way is lack of discipline in the [family’s investment] process,” he argues, “and part of it is just a natural proclivity to take on some highly concentrated risk with a big chunk of the family’s wealth.”
Orion advises families on private equity and real estate assets, but Chiang says he would like to start seeding and building hedge funds.
*A full version of the discussion will appear in the forthcoming February issue of AsianInvestor magazine.