Private Clients & Family Offices - Cambridge Associates https://www.cambridgeassociates.com/en-as/insights/private-clients-family-offices-en-as/feed/ A Global Investment Firm Wed, 14 Aug 2024 17:56:32 +0000 en-AS hourly 1 https://www.cambridgeassociates.com/wp-content/uploads/2022/03/cropped-CA_logo_square-only-32x32.jpg Private Clients & Family Offices - Cambridge Associates https://www.cambridgeassociates.com/en-as/insights/private-clients-family-offices-en-as/feed/ 32 32 Unlocking New Opportunities for Family Investors Through Private Funds https://www.cambridgeassociates.com/en-as/insight/unlocking-new-opportunities-for-family-investors-through-private-funds/ Mon, 15 Jul 2024 14:46:46 +0000 https://www.cambridgeassociates.com/?p=33945 Direct investments are often the first point of entry into private investments (PI) for wealthy families. In building out their direct portfolios, many families invest exclusively in a particular region, industry, or business sector. Similarly, entrepreneurial families with highly cash-generative operating businesses—or those who have recently sold a business—may have portfolios that are narrower in […]

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Direct investments are often the first point of entry into private investments (PI) for wealthy families. In building out their direct portfolios, many families invest exclusively in a particular region, industry, or business sector. Similarly, entrepreneurial families with highly cash-generative operating businesses—or those who have recently sold a business—may have portfolios that are narrower in scope. But for investors whose goal is to maximize long-term returns, direct investments should always be considered relative to other growth opportunities available in the market. Enterprising families seeking more comprehensive private allocations can consider building a PI fund program to serve as a pathway to a multitude of new opportunities. Understanding the potential advantages and challenges of PI fund programs can help family investors consider whether an expansion of their private allocations is right for them.

The Advantages of Private Fund Investments

Benchmarked Return Potential

Private markets can add considerable value to family portfolios. Yet, when it comes to evaluating the performance potential of direct versus fund investments, the landscape differs significantly. The figure shows how private investment funds—as measured by Cambridge Associates (CA) benchmarks—have outperformed their public market equivalents over the past 20 years. It is worth noting that these benchmark returns are net of all fees, demonstrating the strong return potential of PI funds despite higher associated costs.

Although CA uses proprietary asset class benchmarks for private investments, standardized public benchmarks for direct investments do not exist. The bespoke nature and complexity of directs often requires investors and their investment managers to instead rely more heavily on their own qualitative assessments and judgments related to the intrinsic value of the asset.

Greater Geographic Reach

Families who focus only on a local market or region may miss a large part of the investment universe. Investors relying solely on a domestic portfolio risk becoming too concentrated while also forgoing opportunities to invest in leading companies domiciled in foreign markets. The broader the investment options, the higher the bar is raised. What’s more, investment talent is everywhere. We believe PI fund managers that specialize in specific markets, rather than having a global focus, are often better positioned to outperform. For example, a family with an operating business in Europe may seek to further globalize their investment exposure by seeking US-focused fund opportunities. Often, a fund-specific strategy is designed to complement a direct portfolio, augmenting the “in-house” resources of the family office.

Expanded Sector Allocations

Similarly, it can be difficult to source direct investment opportunities outside of the specific sector where a family has built their wealth and networks. And if deals are sourced, it can be challenging to develop the know-how required to be an effective investment partner. Expertise in one sector may not translate to expertise in another. For example, it would be difficult for a family with a background in software to leverage their knowledge and capabilities in an industrial strategy requiring large capital investment and manufacturing knowledge—or vice versa. Yet, both sectors should be considered as part of a family’s diverse investment opportunity set. PI fund investments can serve as a conduit to expand a family’s investable universe beyond sectors familiar to them. Relationships with general partners (GPs) can also provide access to professionals and CEOs outside of the family’s typical investment network, which can have a strategic benefit to other businesses in the portfolio.

Opportunities Across Various Stages

Unlike directs, PI funds offer families the opportunity to balance allocations across the PI spectrum to help manage asset class–specific risk. For example, the risks and returns of an early-stage venture opportunity are different from those in a mega-cap buyout strategy. While it is possible to invest across different asset classes and life cycle stages with direct investments, it typically requires managing a larger number of individual investments compared to fund investing. PI funds invest in companies at various stages of their life cycle, frequently specializing within a certain range of business development. Fund investing is also more capital efficient for diversification, especially for families with a smaller PI budget. Having multiple fund investments that target different deal stages can help reduce the impact of any one investment performing poorly. It also has the potential to provide differentiated sources of return and cash flow profiles.

Opportunities Across Different Deal Sizes and Co-investments

Often, large- or mega-cap direct deals—which can range from $10 billion to more than $200 billion—can be challenging for families to secure with participation dependent on the size and scale of the investors involved. Most direct deals tend to be focused on small- and mid-market segments. Through PI funds, families who may otherwise be left out can allocate to a diverse range of market caps, including small-, mid-, and large-cap investments. This can help improve the stability of portfolio returns and enhance their protection against downside risk. Additionally, PI funds offer professional management, diversification, and access to exclusive investment opportunities that might not be available through direct deals alone.

Co-investments provided by a GP to its limited partners (LPs) offer another pathway for families to engage with investment opportunities that might otherwise be inaccessible. They allow families to invest alongside a fund in specific deals, often with no or substantially reduced management fees or carried interest compared to what would typically apply to fund investments. This may enhance the potential returns on those investments. For families of wealth, co-investments represent a compelling way to gain more direct exposure to high-quality opportunities, while leveraging the expertise and due diligence capabilities of the fund managers. This approach can not only broaden the investment horizon but further align the interests of the investor and the fund manager, helping foster partnerships that could lead to other strategic investment opportunities. Investors should keep in mind that the most attractive co-investment opportunities offered by PI fund managers often parallel a manager’s specific experience and expertise, providing direct exposure in areas outside a family’s traditional skill set and business networks.

Different Generational Factors

Many direct investors got their start as entrepreneurs and grew into experienced business owners. They often leverage the skills honed from growing and running their personal businesses into being active, effective direct investors. However, this can make business and wealth succession planning challenging if the inheriting generation of family members does not share the same interest or abilities as the controlling generation. By contrast, fund investments are more institutional and transactional by nature, and do not require family members to preside over them in the same way. They can be easier to leave to beneficiaries and are suited to long-term investors focused on building a family legacy. PI fund opportunities can also provide a means for working with innovative investment ideas—from artificial intelligence to life sciences and music royalties. This can be a way of further engaging families with members across multiple generations and areas of interest.

Key Operational Differences

Direct investing and private fund investing can both be complex—but in different ways. It can be easy for families to underestimate the work involved with holding a directs portfolio. Direct investments sometimes require investors to sit on a board, provide operating advice, or may require extensive “in-house” capabilities to be dedicated to making an operation successful. Generally speaking, the more challenging the market environment and/or business conditions, the greater the time commitment. While fund investments require investment operational support, such as negotiating and executing LP agreements and managing capital calls and distributions, the operational burden they put on investors tends to be more consistent and—more often than not—significantly lighter.

Potential Challenges of Private Fund Investments

Skill Set Requirements

Whereas direct investments are typically more “hands-on,” a different kind of expertise is usually required to be successful in PI funds. The development and execution of fund strategies demands strategic insight, comprehensive due diligence on fund managers and underlying assets, careful risk management through diversification and hedging, and a deep understanding of fund structures and performance metrics. In many cases, industry knowledge and negotiation experience can give families an edge. To remain aligned with their broader investment goals, families should look for experienced investment managers in building a private fund portfolio.

Important Risk Variables

Blind pool risk is a principal factor pertaining to private funds. Families considering fund investments should remember that they do not have control over how the fund allocates capital. As a result, it is important to recognize that fund investments also often come with a high degree of illiquidity risk.

Fee Considerations

Private fund investors pay higher fees relative to other strategies. Historical returns should be considered when determining how they fit into a family’s broader portfolio, keeping in mind that top-tier PI fund performance may result in additional fees over the long term.

The Family Advantage

In our experience, families of wealth are often viewed as preferred strategic LPs by fund managers. While many PI fund managers can be hard to access, families have certain competitive advantages such as bringing a variety of operating backgrounds that are viewed favorably by fund managers. In addition, some managers appreciate that families can have less complex or formalized governance structures relative to institutional investors, helping with faster decision making through more immediate access to the decision maker(s). Many GPs also appreciate and identify with families who have an entrepreneurial background, allowing them to speak the same language of business ownership and development.

New Horizons

Incorporating a private fund portfolio alongside direct investments presents family investors with a strategic opportunity to augment their private market allocations, enhancing the potential for higher returns and greater diversification. However, skilled implementation is key, given the significant variance in returns within the private funds industry, coupled with its inherent illiquidity and other associated risks. To navigate these complexities, families should align their PI funds approach with their long-term financial objectives and desired level of risk tolerance. This alignment, combined with rigorous due diligence in manager selection, can greatly influence the outcome of their investments. Furthermore, disciplined management of the PI fund program—emphasizing vintage year diversification, maintaining adequate liquidity, and robust risk management—is crucial. By adhering to these principles, families can help create a resilient and high-performing PI fund portfolio that complements their direct holdings and successfully broadens their investment horizons.

Learn more about our Private Client Practice.


Elisabeth Lind, Managing Director, Private Client Practice

Sheetal Zundel, Senior Director, Private Practice

 

Index Disclosures
Bloomberg Aggregate Bond Index
The Bloomberg Aggregate Bond Index is a broad-based fixed income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

FTSE
EPRA Nareit Global Real Estate Index
The FTSE EPRA Nareit Global Real Estate Index Series is designed to represent general trends in listed real estate equities worldwide. Relevant activities are defined as the ownership, trading and development of income-producing real estate. The index series covers Global, Developed, and Emerging markets.


MSCI All Country World ex US Index

The MSCI ACWI ex US Index captures large- and mid-cap representation across 22 of 23 developed markets countries (excluding the United States) and 24 emerging markets countries. With 2,159 constituents, the index covers approximately 85% of the global equity opportunity set outside the United States.

MSCI World Select Natural Resources Index
The MSCI World Select Natural Resources Index is based on its parent index, the MSCI World IMI Index, which captures large-, mid-, and small-cap securities across 23 developed markets countries. The Index is designed to represent the performance of listed companies within the developed markets that own, process, or develop natural resources.


S&P 500 Index

The S&P 500 is a market capitalization–weighted stock market index that tracks the stock performance of about 500 of some of the largest US public companies.

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Video: Beyond Direct Investing: Unlocking Potential with Private Funds https://www.cambridgeassociates.com/en-as/insight/beyond-direct-investing-unlocking-potential-with-private-funds/ Mon, 08 Jul 2024 16:20:04 +0000 https://www.cambridgeassociates.com/?p=33658 For private investors, the diversification offered by private funds—across sectors, geographies, and investment stages—can be a powerful tool for enhancing investment performance. Elisabeth Lind, Managing Director in the Private Client Practice, discusses how a carefully constructed funds portfolio can complement an existing direct investments strategy while significantly expanding the opportunity set.  

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For private investors, the diversification offered by private funds—across sectors, geographies, and investment stages—can be a powerful tool for enhancing investment performance. Elisabeth Lind, Managing Director in the Private Client Practice, discusses how a carefully constructed funds portfolio can complement an existing direct investments strategy while significantly expanding the opportunity set.

 

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Optimizing Wealth Infrastructure for Families https://www.cambridgeassociates.com/en-as/insight/optimizing-wealth-infrastructure-for-families/ Mon, 03 Jun 2024 20:01:16 +0000 https://www.cambridgeassociates.com/?p=31931 Many families who have succeeded in building wealth or experienced a major liquidity event find themselves in uncharted territory. This includes families who are thinking through how to separate the management of their finances and investments from those of their company, as well as those who have recently sold a business. In some cases, a […]

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Many families who have succeeded in building wealth or experienced a major liquidity event find themselves in uncharted territory. This includes families who are thinking through how to separate the management of their finances and investments from those of their company, as well as those who have recently sold a business. In some cases, a family may be reassessing their investment services, feeling their needs have progressed beyond what their current providers are delivering. In others, they may be reconsidering their risk appetite as their focus shifts to building a diversified portfolio and investing with a multi-generational mindset. Each of these scenarios presents a shared challenge—how to position the family for success by designing and building the right infrastructure to propel an investment program forward.

Building an optimized investment infrastructure begins with clearly defined goals and identifying who, both inside and outside the family, will play a role in the wealth management process. Some families choose to build a family office to oversee some, or all of the functions related to managing their wealth in-house. However, for many families, the best approach is to build a team of advisors who are experts in their fields and who can work together to meet the family’s investment needs. This paper serves as a guide for families who have decided to outsource the investment function of their portfolio by partnering with an investment advisor. Its aim is to help families understand the different structural components to consider as they work to create an institutional-caliber portfolio (Figure 1). These structural components include investment management, banking, lifestyle services, legal representation, tax accounting/reporting, and philanthropy.

But First, a Word on Governance and Controls

For a family who has experienced a liquidity event, governance may not be top of mind. However, reflecting on how investment decisions will be made can often provide valuable direction on what type of partners they need. An honest assessment of a family’s desire to be involved in day-to-day investment decisions, oversight, and implementation—and their experience in making such decisions—will guide families to solutions that make the most sense for them. In some families, a primary wealth owner may prefer to make and approve all investment decisions, while in others a delegate or investment committee may be preferable. Considering these complex foundational questions up front can help determine optimal partners.

Investment Management

Working with an Advisor

Investment advisors provide a range of services to help manage a family’s wealth. First, they help the family create an investment strategy that aligns with their financial goals and risk tolerance. This includes due diligence, strategic asset allocation, risk management, investment selection, and regular monitoring of investments. Investment advisors can also provide investment education and retirement planning, estate planning, and tax planning. The role that an investment advisor takes on within an investment infrastructure differs from family to family. For this reason, they often operate in close coordination with lawyers, accountants, and tax specialists to ensure a comprehensive approach to wealth management.

Fiduciary Versus Advisory

When selecting an investment advisor, families should first consider the difference between a fiduciary and advisory relationship (Figure 2). They should consider a fiduciary relationship if they seek a partner who is legally bound to act in their best interests, especially if they prefer not to be deeply involved in day-to-day investment decisions. On the other hand, an advisory relationship might be suitable for families who desire more control over their investment choices and are comfortable with a more collaborative approach.

Portfolio Administration

Handling day-to-day portfolio operations is no small task. Families should note that the amount of time required to source and evaluate investments often goes well beyond what an individual alone can handle, even if they have a strong investment background. Meeting a portfolio’s oversight requirements also involves significant work. An outside investment manager can help family investors sort through the universe of available funds and strategies to identify which investments may best suit their goals. Whether a family creates a single, “one-stop shop” office to support its needs or elects to build a broader team of experts, a strong team is needed to oversee the execution of the playbook. From there, the focus should be on working with reputable and experienced service providers with strong references and a track record of success.

The work of portfolio administration also includes placing and signing off on trades, completing subscription documents, paying capital calls, cash monitoring, approving consent documents, and tracking performance. Cash management—for example, uncovering opportunities to achieve better cash yields than a custodian bank might be offering—is another key administrative task. Considerable work with selected banks is required to set up accounts and services, which we discuss in more detail below.

Many wealth owners try in earnest to take on all this work themselves, but find it becomes too challenging to manage in conjunction with other day-to-day obligations. In most cases, families should have someone readily available to undertake these responsibilities. Some investment advisors, including Cambridge Associates, can manage operational activities for clients—in either a fiduciary or advisory capacity. Alternatively, families who have opted to build a family office often handle portfolio operations with an in-house team.

Banking

Another key infrastructure choice that families need to make involves selecting a bank and the type of investment account they will use to operate and oversee their portfolio. There are two main options to choose from: a brokerage or custodian account (Figure 3).

A brokerage account is typically lower cost, as assets are held in a large general account on behalf of families. Because securities in a brokerage account are tied to a broader pool of assets, they may become encumbered or put in jeopardy in the event of a bank failure. By contrast, a custodian account is considered a more secure method of holding assets, with all securities held in the name of the account holder. Custodian accounts allow for assets to remain freely transferable providing an additional layer of capital protection in the event a bank or broker comes under financial pressure. For these reasons, custodial accounts are often referred to as “safekeeping” accounts. The landscape of brokerage account providers is fairly broad. However, when it comes to custodians, choices are more limited. When deciding between brokerage and custodial platforms, families should also consider the related costs. As service utility varies by preference and goals, families should know what they are signing up for (Figure 4).

Large custodians target families with assets of $200 million or more. These banks generally have better online portals, more service options, investment capabilities, and superior customer service teams. However, they also have revenue targets to consider when taking on new business, so they prefer larger clients and typically charge around 5 basis points (bps) on market value. Mid-size custodians generally charge a higher fee of around 10 bps, but don’t have defined revenue targets by relationship. In some cases, these banks may want to maintain an existing relationship with the family if a third-party manager is brought in. Alternatively, families with smaller mandates can seek out smaller custodial account providers, which offer no-frills services with fees starting at around $12,000. Figure 5 approximates what percent of assets are custodied once a portfolio is built out and fully allocated to its asset class targets.

After electing whether to use a brokerage or custodian account, account-specific add-on services can be determined. If a custodian relationship is selected, families can opt to add accounting services, including alternative asset pricing, so they have an official book of record. This service is useful for tax purposes, as transaction records and tax document collection can be shared with the tax provider.

Performance reporting is another add-on service that many families use to compare data against that of investment service providers. However, if a family’s investment consultant provides performance reporting, they will want to confirm whether two sources of performance data are useful to them or if this is an unnecessary cost. Some custodians offer nominee services to investors, whereby assets are purchased in the name of the bank. This is done for specific reasons, such as maintaining privacy of holdings and managing administrative complexities between clients and their banks. As families determine what kind of accounts they need, they should consult their existing tax service providers to be sure they are meeting all the bank’s documentation and regulatory requirements. An investment manager can next review the final account structure and domicile information and help recommended which investment vehicles may be best suited.

Beyond selecting where assets will be housed, families often need to negotiate terms related to borrowing and lending. For example, they may have an interest in taking a line of credit against their assets or becoming involved in private lending. In such cases, it’s important to consider both the existing banking relationship and the service offerings of other banks to determine an optimal approach.

Lifestyle Services

Services such as property management, bill pay, and support personnel can serve as additional components of an investment infrastructure that are not related to the portfolio. In many cases, support personnel include individuals who are responsible for cash and balance sheet management and tax coordination. The time and convenience provided by such services can allow family members to focus on other priorities such as business ventures and philanthropic work. Other benefits of lifestyle services include additional risk management and enhanced privacy. Finding the right service level starts by defining the scope and objective of the work, be it office staffing, property management, or household and travel administration. It is important to partner with service providers that align with the family’s specific preferences.

Legal Representation and Structuring

In addition to choosing an investment account type or entity, families need to consider their legal representation and structuring needs. Investors need legal support to determine optimal investment structuring strategies and to review investment agreements as new ideas are evaluated. Asset protection is another key component of legal representation—including the use of trusts and limited liability entities. Families should work with legal professionals who have expertise in wealth management and understand their unique needs.

Likewise, determining a clear legal structure is essential for ensuring a smooth transfer of wealth to future generations. A comprehensive succession plan that addresses issues, such as leadership transition, governance structures, and other family dynamics, will help ensure continuity of the investment strategy and an enduring focus on the family’s key values. For these reasons, a family’s legal representation should also be well-versed in wills, trusts, power of attorney, and healthcare directives.

Tax Accounting and Reporting

Tax accounting and reporting is a crucial component of a family’s investment operations. Beyond ensuring compliance with tax laws and regulations—including income reporting, deductions, and capital gains rules—effective tax accounting can also help maximize an investor’s tax efficiency and preserve wealth. Tax laws and regulations are complex and change frequently. Tax advisors who specialize in working with family investors can help with meeting requirements and identify tax planning opportunities. They can also assist investment transaction record keeping, make it easier to prepare tax returns, and respond to any tax inquiries. In some cases, investment managers can work with custodian banks to help streamline the flow of tax documents to maximize efficiency.

Philanthropy

Many families choose to set up a family foundation as part of their wealth planning. This type of capital pool requires a distinct kind of portfolio management, one that adheres to a unique set of spending requirements and liability needs. It can be beneficial to work with a partner that has experience in managing the fund disbursement process and tracking ongoing commitments. Families can also work with a philanthropy advisor to help them define and implement their giving strategy. Philanthropy advisors specialize in helping families clarify their values, mission, and priorities. Having a well-defined philanthropic plan in place can give families greater confidence in their giving strategy.

Complexity Considerations

For families of significant wealth, complexity is a natural byproduct of a well-managed portfolio. Generally speaking, the infrastructure needed to properly support the daily, weekly, monthly, and annual operations of an institutional-caliber portfolio will parallel the portfolio’s size and scale. A relatively straightforward investment structure with few family partnerships can allow for easier implementation and support. By contrast, more complex investment structures—such as unique pooling vehicles to support the needs of many beneficiaries—require additional flexibility. These structures also usually require enhanced tax management and accounting services. Families should conduct a thorough assessment of their internal resources, including time, expertise, and willingness to engage in investment management. If the complexity outweighs the family’s capacity for effective management, simplifying the investment structure or seeking external expertise may be prudent. On balance, an investment framework’s multidimensionality should help—not hinder—the work of serving the family’s long-term financial goals.

Building Toward Success

If or when a family’s wealth picture changes, it may be time to take a step back and determine the right partners and processes for moving ahead. Building the right investment infrastructure will play a crucial role in helping to preserve and maintain wealth over the long term. Families should take care not to underestimate the amount of work that effective investment management and wealth governance involves. Identifying their unique areas of expertise will help to clarify the areas where collaboration and partnership can be best used. In all instances, costs should be commensurate to the value delivered.

As families navigate the complexities of wealth management, it is crucial to remain proactive in building and adjusting their investment infrastructure. We encourage families to regularly review their investment goals, governance structures, and service provider relationships to ensure they align with their evolving needs. Ultimately, family investors should feel safe in the knowledge that they are operating an institutional-caliber portfolio—confident that their capital is not only protected from undue risk but being put to work in the service of their unique ambitions and values.

 


Sean Sullivan, Senior Investment Director, Private Client Practice

Heather Jablow, Head of the Private Client Practice, North America

Kara Paluch and Garrett Walsh also contributed to this publication.

 

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The Private Credit Playbook: Understanding Opportunities for Family Investors https://www.cambridgeassociates.com/en-as/insight/the-private-credit-playbook-understanding-opportunities-for-family-investors/ Tue, 28 May 2024 13:08:04 +0000 https://www.cambridgeassociates.com/?p=31505 Today, private investors and wealthy families are facing uncertainties related to economic growth, inflation, interest rates, and private investment exit opportunities. Yet, these same market challenges are serving as tailwinds for certain asset classes, including private credit. In today’s environment, we believe private credit can deliver attractive returns, supported by a strong foundation in protected […]

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Today, private investors and wealthy families are facing uncertainties related to economic growth, inflation, interest rates, and private investment exit opportunities. Yet, these same market challenges are serving as tailwinds for certain asset classes, including private credit. In today’s environment, we believe private credit can deliver attractive returns, supported by a strong foundation in protected assets and faster capital deployment than other private growth assets. This paper presents an overview of the asset class and a discussion of how family investors can implement this strategy effectively in their investment portfolios.

What Is Private Credit?

Private credit investments are non-publicly traded investments provided by non-bank entities that fund private businesses. These investments encompass a wide range of strategies, including senior debt, subordinated capital, credit opportunities, distressed credit, and specialty finance, each with distinct features. At a high level, private credit consists of two distinct categories—lending and opportunistic (Figure 1).

Private credit strategies offer higher yields than traditional fixed income, with low correlations to both liquid corporate/municipal bonds and equity markets. In addition, private credit involves bespoke terms and structures that can offer ongoing cash yield and charges fees on invested rather than committed capital. Both elements help to mitigate a portfolio’s private investment J-curve impact. 1

Lending Strategies

Lending strategies offer money to borrowers for periods ranging from short to medium term, usually between three and five years. These loans often come with variable interest rates that can change over time. These strategies can be particularly appealing when the loans are for shorter periods and the lender has a priority claim on the borrower’s assets in case of default. Furthermore, many lending funds have provided attractive returns that are not closely linked to changes in interest rates—through self-liquidating investments that are designed to pay themselves off within a three-year period. In 2022, for example, these strategies generated strong positive returns, while liquid high-quality bonds (e.g., US government, corporate, municipal, mortgage) were all down more than 10%.

Private lending strategies feature privately negotiated, senior structured debt and traditionally generate a 8%–10% net unlevered returns per annum. The deals usually include contractual payments, high-quality collateral, enforceable covenants, and bankruptcy remote structures to control and disburse cash from interest payments and fees. Based on our experience, lending strategy managers can currently achieve 10%–12% net 2 unlevered returns, benefiting from elevated base rates and reduced competition from traditional bank institutions.

Opportunistic Strategies

Opportunistic credit investments employ higher return and higher risk strategies by providing companies with a broader set of capital solutions relative to lending-only strategies. These funds fall between each end of the risk spectrum—from traditional direct lending to control-oriented distressed. Credit opportunity and specialty finance funds invest in instruments such as secondary market bonds and loans, directly originated loans with warrants, and structured equity solutions. These funds typically target net returns in the 12%–15% per annum range. We believe they have the potential to deliver even higher returns during periods of market stress when traditional capital sources are less widely available. For example, many opportunistic credit funds preserved capital with positive returns from interest and fees in 2022, offsetting modest marked-to-market losses amid broader interest rate uncertainty.

Combining Lending and Opportunistic

Investors can also create a blend of lending and opportunistic private credit approaches with the potential to target net returns more than 12% per annum. In many cases, we believe a blended private credit program can provide investor a balanced source of returns, with current income received sooner and the opportunity for higher returning assets over medium- to long-duration periods. In these balanced programs, the distributions and return of capital from the lending strategies can also be used to fund capital calls for longer lock-up, opportunistic credit funds with longer investment periods and fund life.

Current Opportunities for Private Investors

The current investment environment presents a unique set of private credit opportunities for families and private wealth investors. Traditional banks have become more cautious about lending due to mixed economic forecasts and interest rate uncertainty. This caution is partly because some borrowers, especially in commercial real estate and corporate debt, are facing difficulties due to higher interest costs, particularly with floating rate loans. Some of these borrowers are finding it harder to refinance their debts at reasonable costs and struggling to sell off loans without incurring significant losses. Consequently, banks are reserving more funds to cover potential losses and are being very careful about issuing new loans, leading to reduced loan activity and less money available for borrowers. As a result, private credit funds have emerged as a critical source of financing, especially for mid-sized companies that are often overlooked by larger financial institutions. These funds are stepping in to fill the gap, providing much-needed capital in a tighter lending environment.

Second, in a market characterized by volatility and ambiguity, private credit offers a relatively stable investment option due to its secured nature and structured returns. Engaging in direct lending opportunities can allow for more customized deal structuring, providing both protection and flexibility. This can include negotiating stronger covenant protections or opting for asset-based lending to further secure investments. Investors may also want to explore opportunities in distressed debt markets. Economic downturns and market dislocations can create attractive entry points for investors with the expertise to navigate these complex situations, potentially leading to outsized returns as markets recover.

Last, it’s crucial for private investors and wealthy families to partner with experienced fund managers who not only have a proven track record in private credit but also possess deep sectoral expertise and the ability to conduct thorough due diligence. We believe partnering with an investment advisor with deep private credit research capability is instrumental in uncovering hidden gems and avoiding pitfalls in this nuanced space.

Understanding Key Risks

While private credit offers attractive benefits, it is important to be aware of its inherent risks. These risks include: illiquidity, constrained upside potential compared to private equity, manager selection, and tax inefficiency.

Depending on the strategy, private credit investments can involve capital lock-ups of three to ten years. Although slightly more liquid than other private investments, private credit investors need to be prepared to commit for the long term. What’s more, unlike the high-growth potential of private equity, private credit strategies often come with fixed returns—or return levels in which the upside is capped. While this can result in more stable returns with lower risk relative to other private investments, it represents a ceiling on how much a strategy can earn.

As with all private market investments, performance dispersion in private credit is wide (Figure 2). In some cases, steady returns might mask underlying challenges, including borrowers that have limited credit histories. We believe success in private credit investing comes from partnering with managers that have a proven track record, expertise in assessing credit risk, and a history of recovering investments. Selecting top-tier managers is essential for tapping into the full potential of private credit and earning an illiquidity premium.

Lastly, tax inefficiency poses a notable challenge for private and family investors in private credit. This issue arises because the interest income generated from private credit investments is often taxed at higher ordinary income rates, rather than the lower capital gains rates applicable to some other types of investments. This can significantly reduce the net returns that investors receive, especially for those in higher tax brackets. The complexity of the investment structures within private credit can also further complicate tax matters, requiring careful planning and management to meet the tax obligation. Understanding and navigating these tax implications can help maximize the efficiency and overall returns of private credit investments (see “Managing Tax Implications”).


Managing Tax Implications

When it comes to private and family investors, taxes are a critical input for investment decisions. Given their higher income orientation, private credit investments are less tax efficient than investments focused on long-term capital gains. Private credit strategies will have different tax considerations depending on the tax domicile of each investor.

Working with an experienced investment advisor to build a diversified program with different sources of return can help improve tax efficiency. To improve tax efficiency, thoughtfully incorporating different strategies into a diversified program is critical. For example, lending strategies with higher income orientations can be paired with opportunities funds that have greater capital gain potential. Investing in certain tax-favored vehicles also may offer solutions in some situations.

Understanding the tax trade-offs specific to each investor’s unique situation before committing to any investment is essential.


Implementation: Things to Consider

To take advantage of attractive yield opportunities available in private credit, family and private investors should carefully consider several key implementation factors (Figure 3). First, liquidity needs are an important consideration, given the illiquid nature of many private credit investments, which may not be easily sold or converted to cash. The longer commitments required of some private credit investments make them more suitable to investors with a longer-term outlook that have a clearly defined target yield. Determining this target requires a close assessment of risk tolerance, as higher yields often come with higher risks.

Diversification is another key aspect of private credit implementation. Investors should consider diversifying their private credit portfolios across sectors that demonstrate resilience and growth potential, such as technology, healthcare, and renewable energy. A diversified approach can help spread risk across various sectors and credit qualities while capitalizing on emerging trends.

Robust due diligence is also imperative. Understanding the borrower’s ability to meet its debt obligations is paramount to mitigating default risks. Market conditions continually influence the availability of opportunities and the risk/return profile of private credit investments. Staying mindful of regulatory and tax policy changes is also important, as these can impact investment structures, compliance requirements, and overall returns.

When implementing private credit strategies, private investors and wealthy families often have a flexibility advantage. They can allocate more nimbly than other large investors, such as pensions or endowments, and are thus well positioned to take advantage of the current robust opportunity set. Flexible asset class definitions and target ranges can likewise allow them to allocate more opportunistically. For instance, credit opportunity funds that target higher returning assets can be sourced from traditional private investment allocations. But private investors and wealthy families can also consider a wider range of capital sources. They can, for example, position lending strategies within a portfolio as part of a fixed income or diversifier allocation, helping to smooth returns and provide protection in adverse market environments. For investors building new private growth sleeves, private credit can provide another option for generating risk-managed alpha.

Giving Private Credit its Due

Private credit investments have experienced a rapid evolution over the past decade. In fact, the private credit landscape has changed so much that investors that last explored it ten or more years ago may not recognize it today. Market conditions have helped to shape what may be a particularly auspicious cycle for the asset class. Higher interest rates and changing credit market dynamics have created attractive opportunities for private investors and wealthy families—but proper due diligence and implementation is essential. Allocations to private credit can be additive to overall portfolio positioning, serving as a complimentary source of growth and income generation along with strong downside protection. Ultimately, a customized approach to private credit that accounts for liquidity and tax challenges may be the best path for investors seeking a consistent income source that is less correlated to traditional fixed income and equity markets.

 


Buck Reynolds, Senior Investment Director, Private Client Practice

Wilbur Kim, Partner, Private Client Practice

Footnotes

  1. A J-curve is an early period characterized by negative returns and cash flows, as investments are initially made and develop over time before they are in a position to be sold.
  2. All financial investments involve risk. Depending on the type of investment, losses can be unlimited. Past performance is not indicative of future returns.

The post The Private Credit Playbook: Understanding Opportunities for Family Investors appeared first on Cambridge Associates.

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Video: Navigating Liquidity Challenges: The Importance of Portfolio Stress Testing https://www.cambridgeassociates.com/en-as/insight/navigating-liquidity-challenges-the-importance-of-portfolio-stress-testing/ Tue, 21 May 2024 19:46:03 +0000 https://www.cambridgeassociates.com/?p=31428 Unsteady markets can cause unexpected liquidity demands and impede, or even undo, hard-earned long-term portfolio growth. Stress testing your portfolio can help avoid the unexpected sale of assets and may enable you to take advantage of opportunities during market downturns. Adam Barber, Senior Investment Director in the Private Client Practice, explains how—and why—a portfolio stress […]

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Unsteady markets can cause unexpected liquidity demands and impede, or even undo, hard-earned long-term portfolio growth. Stress testing your portfolio can help avoid the unexpected sale of assets and may enable you to take advantage of opportunities during market downturns.

Adam Barber, Senior Investment Director in the Private Client Practice, explains how—and why—a portfolio stress test should be customized to your family’s unique situation.

View the video below. Learn more about Cambridge Associates here.

 

Footnotes

  1. A J-curve is an early period characterized by negative returns and cash flows, as investments are initially made and develop over time before they are in a position to be sold.
  2. All financial investments involve risk. Depending on the type of investment, losses can be unlimited. Past performance is not indicative of future returns.

The post Video: Navigating Liquidity Challenges: The Importance of Portfolio Stress Testing appeared first on Cambridge Associates.

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Video: Advancing Family Values: Philanthropy and Impact Investing https://www.cambridgeassociates.com/en-as/insight/video-advancing-family-values-philanthropy-and-impact-investing/ Fri, 22 Mar 2024 18:13:00 +0000 https://www.cambridgeassociates.com/?p=28123 Philanthropy and impact investing, while different, can be aligned and complementary in their intents. Understanding the nuances between the two can help families gain clarity about how to positively influence the world while maintaining their unique investment goals and engaging family members across generations. In this video, Nick Rees, Managing Director in the Private Client […]

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Philanthropy and impact investing, while different, can be aligned and complementary in their intents. Understanding the nuances between the two can help families gain clarity about how to positively influence the world while maintaining their unique investment goals and engaging family members across generations. In this video, Nick Rees, Managing Director in the Private Client Practice, dives into similarities and differences between the two.

 

Footnotes

  1. A J-curve is an early period characterized by negative returns and cash flows, as investments are initially made and develop over time before they are in a position to be sold.
  2. All financial investments involve risk. Depending on the type of investment, losses can be unlimited. Past performance is not indicative of future returns.

The post Video: Advancing Family Values: Philanthropy and Impact Investing appeared first on Cambridge Associates.

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No Surprises: Managing Risk in Family Portfolios https://www.cambridgeassociates.com/en-as/insight/no-surprises-managing-risk-in-family-portfolios/ Wed, 04 Oct 2023 17:56:29 +0000 https://www.cambridgeassociates.com/?p=21550 Creating portfolios that are customized to a family’s unique investment goals and risk tolerance requires ingenuity and flexible thinking. However, the execution of risk management should be more systematic. It depends on setting clear frameworks to monitor risks, consistently implementing those frameworks to ensure one’s understanding of the portfolio remains current, and regularly communicating the […]

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Creating portfolios that are customized to a family’s unique investment goals and risk tolerance requires ingenuity and flexible thinking. However, the execution of risk management should be more systematic. It depends on setting clear frameworks to monitor risks, consistently implementing those frameworks to ensure one’s understanding of the portfolio remains current, and regularly communicating the results of this work to all stakeholders. This last piece plays a crucial role in making sure buy-in and support for the portfolio remain intact, especially through periods of market volatility.

Ultimately, an effective risk management framework is one that accounts for potential risk at every stage of the investment process. Families and their advisors should employ a risk management discipline that considers four components: strategic risk, implementation risk, portfolio monitoring, and communication. By doing so, families will not only better understand the key mechanisms of successful risk management and what is at stake; they can also more effectively pursue their investment goals.

Strategic Risk: Knowing Your Objectives—and Your Expectations

Asset allocation is the top driver of portfolio returns, but it is also foundational to sound risk management. A solid allocation strategy guards a portfolio against its greatest existential threat—failure to meet its long-term return objective and preserve purchasing power by generating a return greater than spending, taxes, expenses, and inflation.

Usually, investors that find their portfolio has drifted off course have made one of three strategic missteps. The first is improperly setting—or failing to adjust over time—the portfolio’s return objective (e.g., the return needed to meet its long-term goals). Often, a portfolio’s return objective is misaligned due to an underestimation of taxes or spending. A second common misstep is failing to set an asset allocation strategy that can generate the return objective over the long term—for example, taking too little equity risk to drive sufficient returns. A third frequent strategic misstep is miscalibrating risk tolerance, including not fully understanding liquidity needs and appetite for volatility risk. Misaligned risk tolerance can result in poorly timed decisions and can impact long-term returns.


Three Common Strategic Missteps

  1. Improper setting (or adjustment) of return objectives.
  2. Asset allocation strategy misaligned with return objectives.
  3. Miscalibration of risk tolerance.

Taking action to avoid these missteps and to establish clear expectations for the portfolio is fundamental to managing strategic risk. Clarity here will help ensure the portfolio remains aligned with the amount of risk a family is willing to take to meet their goals and will increase the chances that the portfolio can be successfully managed through inevitable periods of market volatility. Establishing distinct objectives will also help investors avoid decisions born out of fear and uncertainty that can permanently destroy value.

When managing strategic risk, the formulation of well-aligned portfolio objectives is step one. To increase the chances that a family sticks to its strategy, a few other steps are required (Figure 1).

Implementation Risk: Minding the Details

Most frameworks for measuring and monitoring risk center on investment implementation—how the portfolio is ultimately invested relative to the strategic asset allocation. The risk management framework a family employs should help them clearly understand how a portfolio is positioned and inform decisions on any needed adjustments. Although each family has its own priorities and preferences related to risk, all families should ask several key questions to make sure they appreciate—and are comfortable with—the level of implementation risk in their portfolio.

Does Our Portfolio Have Sufficient Liquidity?

Sound liquidity management is perhaps the most important element of risk management. Failing to plan sufficiently for liquidity needed to support spending, tax payments, capital calls, and expected (or unexpected) outsized withdrawals can result in selling assets at an inopportune time and permanent loss of capital. Awareness of portfolio liquidity risk is critical, and it must be carefully considered when setting the strategic asset allocation. Once set, portfolio liquidity must be consistently monitored to ensure levels remain adequate.

Investors can apply various rules to maintain a prudent level of liquidity, such as ensuring that cash and fixed income total at least two years’ worth (or similar) of estimated spending and capital calls. Portfolios should be stress tested periodically to ensure that portfolio liquidity remains adequate across a range of potential market environments. If this stress testing reveals a potential liquidity mismatch, families can take action before an actual market sell-off occurs, thereby helping to decrease their risk of capital loss (Figure 2).

For example, stress testing the current portfolio using asset class performance during the 2007–08 Global Financial Crisis, given that period’s particularly devastating impact on liquidity, may be helpful in assessing liquidity risk. The portfolio should be able to fund spending and private investment capital calls across all market environments without incurring significant damage to its overall balance and diversification. Measuring the percentage of unfunded commitments to funded commitments will achieve the most comprehensive reading of portfolio liquidity.

Remaining cognizant of manager liquidity windows (including lock-ups and side pockets), regularly running private investment commitment modeling, and having a line of credit in place to smoothly manage transactions are all steps families can take to maintain a healthy equilibrium.

Are We Comfortable With the Risks of Active Management and Confident in our Manager Due Diligence Process?

One of the foundational decisions a family must make is whether to invest passively, allocate capital to active managers, or take a combined approach. Investing passively means aiming for investment returns that closely mirror those of the benchmark, while active management seeks to generate market outperformance. Families should always evaluate the performance of active managers after fees and the impact of taxes.

If a family chooses to invest with active managers, manager due diligence, selection, and monitoring will be key areas of focus. In the due diligence phase, investors will need to gain comfort with a manager’s investment strategy, investment team, strategy for generating outperformance, and portfolio and risk management abilities. In addition to thorough investment due diligence, investors must evaluate the organization and assess potential operational risks (Figure 3).

There is no such thing as an investment manager with zero inherent risk. However, allocating capital to a manager that is not able to execute its investment strategy—or, in the worst-case scenario, is operating fraudulently—represents a markedly greater risk of permanent loss or impairment of a family’s capital. Sufficient resources must be devoted to performing extremely thorough diligence on each potential investment manager to reduce such risks. Once an investment is made, managers must then be actively monitored to ensure nothing of note has changed organizationally or with their investment process that might warrant redemption.

Monitoring managers involves analyzing information distributed by the manager, including investment letters, monthly portfolio and risk summaries, and updates to due diligence questionnaires. At a minimum, prudent monitoring must involve annual direct communication with the manager to evaluate and confirm organizational stability, investment processes, and current investment opportunity set. Red flags to watch for are material organizational changes, such as changes in senior members of the investment team and/or operational team, changes in the investment process, a drift in strategy, and decreases in the asset, liquidity, or investor base that result in instability.

Although monitoring the investment team is often a central focus of investors, continuous monitoring of the operations team is just as important. Operational monitoring may include an annual review of service providers and their pricing policy as well as confirming that the overall operations platform is appropriately aligned with the complexity of the strategy.

Do Our Managers Complement Each Other Sufficiently?

In building a diversified portfolio, the goal is not only to find managers that can outperform over the long term, but also to create a portfolio that is greater than the sum of its parts. To accomplish this, certain allocations should mitigate the risk of others by being differentiated from each other, resulting in diversification benefits. Managers held within a portfolio must be looked at together, with statistical analysis conducted to determine how the proposed portfolio might behave. Investors should review correlation of returns and correlation of value-added to see how differently or similarly managers may behave to each other and to relevant benchmarks. Additionally, reviewing managers’ current holdings will highlight overlapping exposures that can lead to redundancy. These analyses must be undertaken regularly to confirm that historical behaviors and current manager positioning are in line with expectations and match the overall risk/return tolerance of the investor.

Are Our Managers Sized Appropriately in the Portfolio?

To ensure that high-conviction managers are sized appropriately, frequent analysis of the portfolio’s level of “active risk” is necessary. Active risk represents the potential impact on the performance of a portfolio relative to a policy benchmark. 3

Active risk is the product of an investment’s capital allocation and the tracking error of that investment relative to its benchmark. Higher levels of active risk mean a manager is more likely to impact portfolio performance relative to the benchmark, either positively or negatively. The right level of active risk—per individual manager and total portfolio—will vary by investor. As a general guideline, we believe it is prudent for individual manager positions to be capped at 50 basis points (bps) of active risk (0.50%). For example, a manager with a 10% tracking error relative to its benchmark should be sized at a max of 5% of the portfolio. The important thing is to understand why individual managers are sized the way they are and to regularly monitor a portfolio’s active risk to ensure the sizing of individual positions remains aligned with conviction in the manager.

Regular analyses of a portfolio’s active risk should be conducted across all regions and asset classes. As an example, Figure 4 details a US equity manager portfolio that holds a passive index manager with limited active risk and four active satellite managers with significantly more active risk. The equal-weighted portfolio measures the four active managers equally by percentage of total portfolio. In this example, the risk-weighted approach instead attempts to equalize by active risk, resulting in a more optimal overall US equity portfolio that has higher trailing returns and lower active risk.

Are We Aware of Our Portfolio’s Unique Strategic Exposures?

Strategic exposures can take many forms in a portfolio—including tilts toward certain geographies, sectors, or style factors in equity portfolios, or duration positioning in fixed income. Investors should understand which exposures are intended as part of their portfolio strategy and be prepared to identify and act on any unintended exposures that surface. Most investment portfolios have clearly defined target parameters for various asset classes, making basic exposures relatively easy to track. However, style factors are less overt and are worth watching closely. Depending on manager selection, even a broadly diversified portfolio can have tilts toward various return drivers that can move in and out of favor, depending on the market cycle. Outsized style exposure, including to value, momentum, quality, or dividend yield, is not inherently bad, but overexposure may lead to a portfolio performing differently than intended.

Additionally, measuring a portfolio’s volatility and sensitivity to market changes—its “beta” as compared to the “beta” of the policy benchmark—is essential to ensure the portfolio remains aligned with the intended risk level (Figure 5). If a portfolio, for instance, has a beta of 0.7 compared to a policy benchmark beta of 0.8, it may be “under risked” and may have to rely heavily on outperformance of its managers to match the return of the policy benchmark in a rising market—a big ask of active management. Conversely, if the portfolio beta is significantly higher than the policy beta, the portfolio may be exposed to larger potential drawdowns and higher volatility.

Are We Minimizing Risk Through All Steps of our Investment Execution?

Perhaps slightly less exciting—but certainly no less important—is that investment portfolio implementation must include a focus on the operational side of investing. The ongoing management of a portfolio requires the proper processes to support and execute trades, fund capital calls, manage stock distributions, handle subscription documents and subsequent manager communications, and enact the “know your customer” and anti-money laundering measures that are required for manager relationships. Families are susceptible to organizational risks, such as fraud or cyber risk, and having effective controls in place is essential to protecting a family’s wealth and privacy. Failure to adhere to any of these requirements can result in delays, trading errors, and/or missed deadlines, which can be detrimental to achieving desired returns. Having sufficient operational support—either within the family office or through outsourced partners—is key to effective investment execution and reducing execution risk. Family offices should consider engaging a third party to periodically review their internal controls and investment oversight procedures to minimize their risk.

Portfolio Monitoring: Watchful Vigilance

Portfolio monitoring is the unsung hero of risk management. It involves systematically reviewing each of the elements of the risk management framework a family has developed to ensure ongoing sound management of the portfolio. Whether you have a long lived or newly formulated investment strategy and implementation plan, their effectiveness over time will correlate directly to how well each is monitored on a yearly, quarterly, and daily basis (Figure 6). An investment portfolio is a complex machine—proactive observation is vital to ensuring it functions successfully.

Establishing a systematic process for monitoring a portfolio is a best practice. This should not be a “check the box” exercise, but rather should be focused on analysis that can actively inform decisions for the portfolio. Figure 6 provides an example of a framework that focuses on strategic alignment and informs each of the key questions discussed above. A family might emphasize different elements in their unique risk management framework. The important thing is to establish a process that is relevant to the family—and then to stick to it.

Communication: Keeping All Stakeholders in the Know

Proper management of strategic risk, implementation risk, and portfolio monitoring only goes so far if it happens in a vacuum that includes only investment staff or advisors. Regularly communicating the outcomes of a well-executed risk management framework to all stakeholders is an essential part of the process. Providing this transparency enables the family to remain confident that the portfolio is being implemented appropriately to achieve what it’s designed to accomplish. Establishing a cadence of communication as part of the risk management framework ensures that stakeholders will be informed, which can increase trust and help to reduce behavioral risks, especially through periods of market volatility.

Maintaining Long-Term Confidence

We believe the most effective investors are those that have a clear understanding of risk. What’s more, they understand that effective risk management is not a checklist of one-off measures, but an ongoing, highly disciplined process. Family investors should be clear-eyed about the resources needed to strategize, implement, monitor, and communicate about a portfolio for it to meet its goals over time. Working with an investment manager that can provide timely analysis and routine portfolio health checks should help families feel confident that their portfolio is well structured—and positioned to succeed.

 


Heather Jablow, Head of the Private Client Practice, North America

Mark Dalton, Managing Director, Private Client Practice

Scott Palmer, Senior Investment Director, Private Client Practice

Footnotes

  1. A J-curve is an early period characterized by negative returns and cash flows, as investments are initially made and develop over time before they are in a position to be sold.
  2. All financial investments involve risk. Depending on the type of investment, losses can be unlimited. Past performance is not indicative of future returns.
  3. Active risk is defined as the size of the position multiplied by the standard deviation of excess returns over a benchmark. Active risk can be calculated for the total portfolio or any individual active position (e.g., manager performance in relation to the manager benchmark).

The post No Surprises: Managing Risk in Family Portfolios appeared first on Cambridge Associates.

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Video: Building Our Private Client Business https://www.cambridgeassociates.com/en-as/insight/video-building-our-private-client-business/ Fri, 11 Aug 2023 14:29:27 +0000 https://www.cambridgeassociates.com/insight/video-building-our-private-client-business/ Since the early 1980s, we have been building custom portfolios to help private clients and family offices grow their wealth and continue their legacies. Drawing on deep experience and dedicated partnerships, we work with our clients to help meet their goals and preserve their private wealth. Today, our clients span the globe, with the practice […]

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Since the early 1980s, we have been building custom portfolios to help private clients and family offices grow their wealth and continue their legacies. Drawing on deep experience and dedicated partnerships, we work with our clients to help meet their goals and preserve their private wealth. Today, our clients span the globe, with the practice making up a large portion of our business.

In this video, our co-founder, Jim Bailey, and CEO, David Druley, discuss how this business came to be — beginning with David Rockefeller. Watch now to learn more.

 

 

 

Footnotes

  1. A J-curve is an early period characterized by negative returns and cash flows, as investments are initially made and develop over time before they are in a position to be sold.
  2. All financial investments involve risk. Depending on the type of investment, losses can be unlimited. Past performance is not indicative of future returns.
  3. Active risk is defined as the size of the position multiplied by the standard deviation of excess returns over a benchmark. Active risk can be calculated for the total portfolio or any individual active position (e.g., manager performance in relation to the manager benchmark).

The post Video: Building Our Private Client Business appeared first on Cambridge Associates.

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