Family offices with at least $1 billion in assets are increasingly choosing quantitative trading strategies as a cheaper alternative to hedge funds, a Citigroup Inc. executive said.
“A lot of family offices think hedge funds are too expensive” and are instead opting for systematic strategies as a less costly way to protect against market swings, said Hannes Hofmann, global head of the bank’s Family Office Group. “What’s particularly interesting for family offices today is the hedging opportunity.”
Using technology and quant formulas to automate investment processes has been a powerful force on Wall Street and other financial hubs for decades, but few family offices developed the in-house capabilities to manage allocations in such a way.
That’s rapidly changing as the number of major family offices booms worldwide, often led by executives who formerly worked at global banks or other institutional firms. They’re also helping drive a global rebound in private equity deal-making as well as becoming activist investors in listed businesses.
One of Citigroup’s biggest family office clients with a diversified portfolio recently allocated a nine-figure sum to quantitative strategies to protect against downturns in real estate and equity assets, Hofmann said. The strategy includes a frequent rollover of options to help reduce risk.
“Typically, the family offices with these strategies are big enough that they have some specialists on their team,” he said, declining to disclose client names. “We’ve seen European family offices jump into this, and we’ve seen Middle East family offices ask about it. It’s a global trend.”
The largest and best-performing hedge funds often charge clients 2% of assets managed and 20% of profits. In 2023, average management and performance fees hit the highest since at least 2015 — 1.7% and 17.7%, respectively, according to a January report from Goldman Sachs Group Inc.
The number of family offices has increased over the past two decades to more than 10,000 by some estimates. Some of the biggest include Bill Gates’ Cascade Investment, Michael Dell’s DFO Management and Mousse Partners, run by the family behind Chanel. A Citigroup survey last year of 268 family offices found each represented about $2 billion of private wealth on average, with 4% of their portfolios allocated to hedge funds.
With major elections looming in the U.S. this year and about half of the global adult population likely going to the polls at some point in 2024, the potential for political upheaval and volatility is helping fuel the move to quantitative strategies.
Unexpected results from votes in India and France in the past few months have already sparked swings in local stock markets, while the UK, South Africa and Mexico have all held general elections this year.
“Family offices are saying, ‘Look, we want to stay invested, but something doesn’t quite feel right in terms of protections,’ ” said Hofmann, who joined Citigroup in London during 2022 after working at JPMorgan Chase & Co. for about two decades. “That’s why we are seeing these [quantitative] products move from a niche allocation in the hedge fund space into the core part of the portfolio.”