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Family Offices: Assessing Investment Success and Future Risks

Yannis Sardis, 22 September 2021

‘The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.’
Charles Tremper, American Author on Law and Risk Management

According to a survey of US Family Offices (FOs) by Fidelity (‘2021 Fidelity Family Office Investment Study’), single and multi FOs use different sets of investment metrics for the implementation and evaluation of their investment strategies.

In terms of their expected returns, 35% of them have an absolute return target, 28% have a relative return benchmark, 4% have an absolute risk target, 10% aim to beat ‘the market’ in rising markets but not lose when markets drop, whilst 12% do not have a specific investment goal. To pair these percentages with the workforce dedicated to achieving them, for single FOs the (median) percentage of personnel dedicated exclusively to investment management is 25% of the total, a number that feels low considering that the asset allocation of such an organization may span a wide range of traditional and alternative instruments, whether publicly or privately held.

So, whether FOs consequently use 3rd party consultants (39% of them do) or not in their investment process, one wonders if they distinguish between investment performance and return in their chase for success and growth. Do portfolio managers, within (especially single) FO operations, assess their (proprietary or client) success on a risk-adjusted basis, thus looking at their true performance instead of being led by single return data points?

Be(coming) Risk-Conscious

As this blog has emphatically discussed in the past, a risk-conscious portfolio modelling may include a wide range of risk factors against which a multi-asset portfolio can be stressed and revaluated. A versatile risk management software solution can accommodate various risk calculations and Stress Testing analysis frameworks, based on both market and macro-economic factors that may affect a portfolio’s risk and performance. Such a flexibility allows managers to tailor scenarios to their specific conditions and skills and adapt their decision-making to the current market conditions.

Notably, in terms of the largest risks to investments for the next three to five years, 28% of Fidelity’s survey participants were concerned about valuations, 22% about increasing inflation, and 18% about a potential interest rate hike by the Central Bank. The participants who identified inflation as the main potential risk, would increase cash and asset liquidity, and de-risk their portfolio within asset classes (whilst 32% plan no changes to hedge their holdings from inflation). How could a money manager perform such an analysis in a systematic and data-driven fashion?

To facilitate such a multi-factor analysis (the factor being, for example, the inflation rate), a risk assessment system estimates the correlation between the time series of the nominal interest rates affected by the increase in inflation projections and the time series of the portfolio holdings (such as equities, bonds, commodities) at any granularity level (such as asset class, sector, currency, geography). Such a scenario simulation set-up allows managers to customize their cross-asset correlation to incorporate their prevailing investment views.

The chosen risk factors largely depend on the portfolio’s asset structure and instrument composition, and can include (a) Interest Rates, for holdings the valuation of which depends on interest rate evolution, (b) FX Rates, for holdings denominated in currencies other than the portfolio’s base currency, (c) Price Time Series, for equity-like instruments, such as stocks and Exchange Traded Funds.


Single FOs could use smart integrated portfolio and risk management solutions to leverage-up the capacity and productivity of their (relatively small) investment-focused teams, whilst larger multi FOs could utilize the analytical depth of such digital tools to improve and solidify their risk-adjusted performance, develop diverse investment strategies, and consequently attract new clients via consistently sound investment practices and transparent reporting on the risks assumed for the returns targeted.

Such integrated digital solutions could also assist FOs in testing and validating the investment ideas and proposals that they receive from the external consultants that they heavily use.

FINVENT Software Solutions is a provider of financial software applications and custom engineering services. The award-winning KlarityRisk platform specializes in investment risk analytics and fixed income performance attribution reporting, and it is offered to Private Wealth institutions, Asset Managers, Hedge Fund Managers and Family Offices.

Do you wish to understand more about our Portfolio and Risk Management solutions? Please contact us at and we will get in touch.