A conservative family office managing 100 million or less in total assets often face issues with finding quality investments. For the chief investment officer, the act of balancing the needs of the beneficiaries with trying to grow the portfolio is a very delicate task. Being too aggressive would be a nightmare to explain to the stakeholders, while doing nothing means looking bad when the broad market indices are flying.
The Forever Crush in a Low Interest Rate Environment
In the old days, holding onto government bonds generating north of eight percent was a no-brainer for family offices aiming for stability in income generation. But those days are long gone. The forever-falling interest rates on government bonds essentially make them unsuitable for any portfolio looking to generate yearly cash flow. Existing holdings can generate decent one-time profit, but it is definitely a no-no for any new purchase.
Similarly, real estate holdings are facing a similar issue. Existing holdings have a nice profit on the books but acquiring new ones risk major corrections any time. Worst yet, the income generated from the properties after tax and other always rising expenses often ends up not much better than bonds.
That leaves the stock market as the remaining alternative. Yes, the stock market has been doing well in the eyes of the media, but the truth is, if you did not bet big on the top ten tech stocks, your portfolio is going nowhere. Well, more likely going south.
Hedge funds have been going through a very tough time since 2009 thanks to the unconventional interest rate policy of the central bankers. Many big names in the hedge fund world have had to close their doors due to lackluster performance, so putting money in a hedge fund during this extreme policy environment may not be such a good idea.
Start up investing takes a lot of expertise and connections to do it right. One cannot just bet on a new company and assume it will do great. Average family offices do not have the kind of experts to make the proper analysis, let alone make the right investment decisions.
In reality, an average family office will probably generate five percent return after all the taxes and expenses. That means with a portfolio of 100 million, the return on investment is often just 5 million or less after expenses and hidden costs.
How High-Frequency Investing Can Help
To simplify the calculation, let’s assume the portfolio is evaluated at exactly 100 million. By allocating 5 million into High-Frequency Investing programs, the return on the rest of the portfolio would be reduced (in ratio) down to 4.75 million. If there are overhead expenses that cannot be scaled, the amount could be further reduced down to 4.5 million or even 4 million.
By choosing a set of conservative High-Frequency Investing programs, the 5 million in capital can be put to work to generate 60 percent to 100 percent return annually with a controlled downside risk at 50 percent loss cutoff.
The net effect of adding High-Frequency Investing to the mix would allow the 100 million portfolio to produce better than 8 million return yearly without taking significantly more risk than what it is already dealing with.
In a way, the employment of High-Frequency Investing is no different from acquiring a successful business that generates very good positive cash flow annually. The advantage of using HFI is that the major financial markets are always there, and there are many ways to extract profits from them while finding a successful business that generates 3-to-5 million positive cashflow, which will usually take a lot more than 5 million to buy. Above all, the cost of managing and monitoring the business can easily degrade the performance of the business over time, especially during changing economic conditions.