With the mission of preserving and growing multi-generational wealth, family offices should be leading the charge in proactive risk management. Surprisingly, many of these offices lack the formal structures and strategies necessary to weather market storms. Recent data reveals a concerning trend: family offices are not as prepared as they should be when it comes to managing investment risk.
According to a Dentons survey of family offices, 50% do not have a formal investment policy or even an investment committee. Even more concerning, only 17% have a tail-risk hedging strategy in place, leaving them particularly vulnerable to market downturns. These gaps reveal that many family offices are operating without the necessary safeguards to manage risk effectively, leaving significant wealth at risk.
1. 50% Lack Formal Investment Policies or Committees
Without a formalized investment policy or a dedicated investment committee, decision-making becomes inconsistent and reactionary. A formal policy provides clear guidelines on how assets should be allocated, managed, and monitored. Without it, strategy is left to improvisation, exposing the portfolio to unnecessary risks.
2. Only 36% Monitor Risk Across Asset Classes
Risk doesn’t exist in silos—equity, fixed income, and alternative investments all present different risks that need to be considered collectively. Still, only 36% of family offices engage in holistic risk monitoring - this lack of a cross-asset perspective can lead to blind spots, with family offices potentially overexposed in certain areas, compounding the overall portfolio risk.
3. Only 17% Have Tail-Risk Hedging Strategies
Tail risks—rare but devastating events that can cripple a portfolio—are something that all sophisticated investors should hedge against. Almost unsurprisingly at this point, only 17% of family offices have a hedging strategy in place, consequently remaining vulnerable to extreme downside scenarios like market corrections or geopolitical shocks.
So, why are family offices lagging behind when it comes to risk management - particularly investment risk? Part of the issue lies in their fragmented approach to risk. Without a centralized policy or a dedicated team to monitor portfolio risk, many offices adopt a reactionary approach, responding to crises only after they occur.
Additionally, some family offices may be hesitant to adopt hedging strategies due to a lack of familiarity or concerns about costs. However, the cost of not having such safeguards is far greater when a tail event occurs. Over-reliance on a few key individuals or outdated systems can further expose portfolios to potential losses.
1. Implement a Formal Investment Policy Statement (IPS)
A formal investment policy statement will establish clear rules and objectives for portfolio management, providing a consistent framework for decision-making. Much like other sophisticated institutional investors (like endowments or pension plans) do not operate without an official policy in place, family offices need to adopt the same practice on their way to institutionalization.
2. Holistic Monitoring Across Asset Classes
Moving towards holistic risk monitoring that provides a clear view of risk exposure across traditional and alternative asset classes, especially as family offices move towards incorporating a bigger % of their wealth to alternatives, or even new asset classes such as cryptocurrency. A well-rounded perspective helps decision-makers better understand where risk is concentrated and enables them to act preemptively to protect the portfolio.
3. Implement Hedging Strategies
Incorporating tail-risk hedging strategies helps protect portfolios from severe downside events. Whether through options trading, risk-managed ETFs, or other hedging tools, these strategies significantly reduce the impact of catastrophic market events, preserving capital when it is needed most.
4. Leverage External Advisors
For family offices that lack internal risk management expertise, partnering with consultants who specialize in investment risk can be a valuable resource. External advisors bring the benefit of specialized knowledge and the ability to implement sophisticated risk strategies that may be beyond the capabilities of in-house teams.
No enterprise can afford to be reactive in managing risk. Without a clear framework, family offices are more likely to divest from underperforming assets during times of market stress, missing out on potential recoveries. By taking a proactive approach now, you ensure your family office can anticipate and mitigate risks before they materialize—a skill critical to preserving wealth across generations.
Unsure if your family office is equipped to manage investment risks on its own? Get in touch with a Kiski expert.
