Our US correspondent reports on more of the conversations that took place at this year's annual investment summit for family offices, as organized by the publisher of this news service.

The growing popularity of alternative investments and concern over rising risk were both apparent at this year’s Family Wealth Report Family Office Investment Summit in New York.

Industry experts stressed the importance of due diligence when choosing fund managers for alternatives. “Manager selection is absolutely key for success,” declared Dan Scansaroli, head of portfolio strategy for UBS Wealth Management.

Speakers were candid about the benefits and risks of investing in alternatives. 

“Adding alternatives can add value to a portfolio, but investors have to keep in mind they are illiquid and come with capital calls and lock-up periods that can last up to 10 years,” said Patrick Kennedy, founding partner of All Source Investment Management.

While the lengthy lock-up period can tie up capital and is a formidable risk, ultra-high net worth investors with longer time horizons can also benefit. “Family offices want to capture an illiquidity premium” that can result in outsize market returns, Scansaroli said.

But investors also need to consider that the funding source for alternatives is from cash, public equities or recycled distributions. “If the funding is from cash, it may not be worth the illiquidity risk,” he added.

The gorilla in the room
Private equity is “the gorilla in the room” when it comes to alternatives, Kennedy said. “There’s a huge opportunity set as private companies are growing faster and staying private longer,” he said.

Private equity is evolving quickly, as “technology is now doing the grunt work,” noted Ayo Ekhator and Alex Goodwin, co-founders of Bridge, a company that provides infrastructure software for alternative investment and private markets allocation .  

The executives outlined PE’s changing apprenticeship model and questioned whether the traditional mentorship model will hold up. In addition, Ekhator and Goodwin pointed out that increased efficiencies at tech companies may reduce the need for late-stage venture funding, potentially altering the universe of investible opportunities.

Artificial intelligence is also impacting alternatives investments. “Data is coming in and insights are coming out,” said Tal Shahar, CEO of Atlas Invest. Will AI replace analysts? According to Shahar, the combination of human experience and AI insights will result in even more judicious choices for alternative selection.

AI’s ability to screen data will enable analysts to make better predictions and be more efficient, Shahar asserted. Private debt, he said, will be the ‘practical entry point” for AI. "This shift will result in “more efficient, cost-effective strategies that align with the evolving needs of family offices,” he maintained.

Rising risk concerns – Regulatory demands and replacing manual processes are the primary reasons why wealth managers are upgrading risk procedures, according to Jay Wolstenholme, capital markets strategic advisor for Datos Insights.

Other key reasons include more precise benchmark error tracking, data management, operational efficiency and new asset-class investments, Wolstenholme said, describing the rising risk/performance analytic demand across the family office.

One of the biggest risk firms and family offices face is the knowledge that they lose when people leave, said Vanessa Liu, CEO of Sugarwork, a company that uses artificial intelligence to preserve that knowledge before employees depart. 

There is also a major risk when firms allow software vendors to access their data, said Daniel Faddoul, CEO of Auditive, a company that provides third-party oversight. “Data itself is a risk,” Faddoul said.

Demonstrating work-flow efficiency can be a significant risk for traders, according to Alex Reyfman, CEO of Tradewell Technologies, a company that automates electronic trading of corporate bonds and implements systematic strategies to reduce transaction costs.

Custom indexing and fund accounting were also discussed at the conference.

Custom indexing – Custom indexing strives to achieve “meaningful tax alpha, customization and values-aligned investing opportunities,” said Ashvin Viswanathan (pictured), senior equity portfolio manager for Wilmington Trust.      


Ashvin Viswanathan

By combining investing strategies and technology, Viswanathan explained, customized separately managed accounts attempt to replicate the performance of an index by buying a large percentage of the underlying securities and replacing the positions as needed.

Fund accounting – Fund accounting's ability to provide real-time data accuracy, robust workflows and clear reporting can help family offices make informed decisions and manage risk proactively, said Cori Rodda, principal of FWO Accounting and Consulting.

While best-in-class software can significantly upgrade family office technology, getting the different software programs to talk to each other remains a problem, Roda added. An even bigger problem is family offices “waiting five to seven years too long” to upgrade their software she said.

To see earlier articles about the summit, click here, here and here.