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In an environment of low or even negative interest rates, along with financial institution risk, the general requirement for risk free liquidity has resulted in the concept of return being sacrificed; nil returns seen as a ‘cost’ of holding an asset that is both secure and immediately accessible.
Many years ago we met with an in-house Family Office team who were managing the family’s cash/liquidity with a mandate that was demanding even in pre 2008 crash terms; to provide an investment pool that not only provided 30 day liquidity, but was diversified, non market correlated and secure but with a yield in excess of 5%.
Against the background of their activities in the very demanding, “no excuse” environment of private wealth offices, their focus on building robust portfolios of global liquid alternative niche investment strategies has proven its worth for over a decade already. This could in particular be seen in the crisis years 2008 and 2011, when they were able to achieve constant liquidity of the portfolio and at the same time double-digit investment results for the wealth owners – without giving up attractive returns in the “normal” years when no crises hit.
Two years ago, the family allowed the team to realise their own ambitions and whilst continuing to manage the family mandate, the team are now opening their programme to other G9 families.
“In our function as private wealth office for UHNWI we manage a mandate which is unique in both its characteristics and its results: It has provided simultaneous protection and growth of wealth. This mandate is the natural expression of our rare, yet proven expertise in global liquid alternative niche investment strategies. Such strategies are managed by specialised investment firms, they try to exploit inefficiencies in all segments of global financial markets, and they are very nimble and opportunistic in their investment approaches. Often, they are difficult to source, have capacity-constraints and/or are closed to outside capital. Access to those strategies is sometimes a matter of know-how, negotiation and patience."
An investment into those strategies contains two important value-adding components:
1) The identification, analysis and selection of the strategies themselves and
2) The allocation of capital among them, in order to build a robust, diversified portfolio which should exhibit total independence to financial markets’ moves.
At the end of our investment process therefore stands a portfolio which should be unfazed by moves in financial market factors, such as the equity market beta or interest rates. Such a portfolio exists today and it has actually been constructed with a view to even profit from corrections in financial markets.
Our return expectations over an economic cycle for the portfolio are between +5% and +12% p.a. in USD with a sharpe ratio above 2. At the same time – and this is very important to our mandators - the portfolio exhibits monthly liquidity and undergoes stringent monthly reporting requirements. In that way the wealth owners enjoy total transparency and the knowledge that they can dispose of their monies at will.
The added value of our approach becomes apparent in times of financial stress or even dislocation in financial markets. The chart below shows that a classical allocation of 40% bonds and 60% equity can lead to very disappointing results (a loss of -31% of a “normally” safe portfolio) when times become “abnormal” (October 2007 to February 2009).