Chinese family offices seen moving from real estate to liquid assets

This Q&A with John E. Oden, Principal and Head of Family Offices, Asia for AllianceBernstein was conducted and edited by Taylor Hall. It appeared first in Bloomberg Briefs | Hedge Funds Asia. 

Q: What trends are you seeing for family offices in Asia?
A: There’s a growing trend toward the establishment of family offices in China and an increasing number of qualified professionals who can assist Chinese clients in directing them on important cross border tax and estate matters. We’re seeing more chances to provide comprehensive planning advice to clients alongside their personal advisers. Finally, clients are increasingly demanding an enhanced digital capability, including the ability to access their accounts and operate from a mobile platform.

Q: What type of financial products do your clients like?
A: It’s no secret that Chinese families love income and high returns. Meeting these objectives of high returns in a historically low yielding environment is a challenge, however, we’ve been successful in some cases augmenting a small portion, usually less than 20 percent, of a globally diversified stock and bond portfolio with more illiquid alternative assets, which likely will increase the overall returns of the portfolio but commit those parts of the portfolio to a longer time horizon. More recently, Chinese families in particular seem to be shifting their focus from direct real estate in the U.S. and Canada to liquid investment strategies that provide comparable returns to private equity, or to more traditionally balanced portfolios of stocks and bonds.

Q: What types of liquid strategies?
A: Within the past year, there’s been increasing demand for U.S. equity portfolios. There’s a widespread belief in the international marketplace that the U.S. is a safe haven to invest in. All of this has led to demand for U.S. portfolios. More established family offices, with internal CIOs and investment staff, are increasingly looking for equity portfolios that control downside risk, such as long-short equity, and also for equity portfolios with very high levels of active share, by taking a highly concentrated approach to equity investing using fundamental research. The offices realize that volatility is likely to increase, and that beta, or market-level returns, are likely to be lower than recent history. This is not an attractive combination, but long-short equity managers with proven track records of protecting investor capital in periods of volatility, and concentrated equity managers with an ability to deliver consistent alpha, can provide for a dramatically different return profile from the beta available in the market today.

Q: What is driving the shift away fromdirect real estate?
A: In general, real estate is still popular with Chinese investors, but many stop after the purchase of one or two residential purchases in a major U.S. city, like New York or L.A. Managing real estate from across the ocean can be a chore as well. And in most cases, the investment has to be held for a longer period of time to realize a good return. Many who have invested in the EB-5 program are experiencing liquidity events, and are looking for other investment opportunities.

Q: What about hedge funds? Are you seeing investor demand?
A: It is no secret that hedge funds have been challenged over recent periods. However, hedge funds that protect on the downside, particularly long-short equity portfolios, can be attractive to Chinese families and family offices, particularly with equity valuations where they are today.

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