Role of Hedge Funds and PMS in Family Office Asset Allocation

If you are managing a family office, you already know that traditional investments are not enough to preserve and grow wealth over generations. This is because market volatility, inflation and global economic shifts can undermine conventional strategies. By incorporating portfolio management services (PMS) and hedge funds, you can gain professional expertise and access alternative investment opportunities. Let’s have a closer look at how these solutions can fit into your family office asset allocation strategy.
 

Why Do Family Offices Look Beyond Traditional Investments?

The number of family offices in India rose sharply to about 300 in 2024 from 45 in 2018. This shift is encouraged by several limitations of traditional investment options, some of them include:
 

• Market Volatility: The Stock and bond markets may have sudden changes, which can adversely affect the portfolio value.
• Limited Diversification: Traditional assets can tend to put investment in a few areas or industries, which may increase risk in your portfolio.
• Lower Absolute Returns: Fixed-income securities and equity investments may underperform during some economic cycles.
• Currency Risk: In the case of family offices that are exposed globally, local investments might not be hedged against foreign exchange risks.
• Liquidity Constraints: Certain bonds or large-cap stocks may not be flexible enough to allow opportunistic investment.
• Need for Professional Oversight: As wealth increases, families seek more active and expert management services. To fulfil these needs, SEBI-registered PMS providers offer tailored investment strategies which are aligned with high net worth families’ risk tolerance and objectives.
   

In response, many people are adopting family office diversification strategies that include spreading capital across asset classes, regions, and investment horizons to reduce correlated risks.
 

Understanding Hedge Funds in the Family Office

A hedge fund is an investment fund that is professionally run and uses advanced strategies to generate returns both in a booming and a declining market. Hedge funds can employ long-short equity, event-driven or macroeconomic strategies, exposing you to opportunities not available to traditional investments.
 

Hedge funds in family office asset allocation play a significant role in family offices as they enable you to:
 

• Generate returns that are better than the usual market standards to improve the performance of a portfolio as a whole.
• Manage risk through risk management methods like hedging in case of market plunges.
• Become more diversified in your portfolio to incorporate less correlated assets with more traditional equities and bond assets.
   

Throughout the process of incorporating hedge funds in your portfolio, you are able to seek higher returns and control risk more actively and more creatively.
 

Portfolio Management Services (PMS) for Family Offices

A Portfolio Management Service (PMS) is a customised platform, wherein expert managers will actively manage your investments based on your family office objective, risk tolerance and investment horizon. PMS gets your portfolio synchronised to your strategic goals and gives your portfolio professional guidance.
 

Using PMS allows you to:
 

• Personalise your asset allocation and spread investments by sector, geography, and classes depending on your priorities.
• Take advantage of the active portfolio management approach in which managers change the holdings in response to the fluctuating markets and economic activities.
• Be transparent and in contro, and make sure that you are constantly aware of the performance and investment of your wealth.
   

PMS in family office strategy can allow you to get the benefits of professional management with the flexibility of staying updated and engaged, so that your portfolio updates as per your family's evolving needs.
 

Hedge Funds vs PMS - Key Differences for Family Offices

In deciding how to organise your family office portfolio, you should be aware of the distinctions between hedge funds and PMS. The two are both important but carry different functions.
 

Here’s the quick comparison that highlights the key differences between Hedge Funds vs PMS:
 

Key Considerations Before Allocating to Hedge Funds and PMS in a Family Office

Prior to the inclusion of hedge funds or Portfolio Management Services (PMS) to your family office strategy, it is important to consider the following factors to determine the alignment with your long-term goals:
 

• Investment Objectives Alignment: Identify how the allocation is capital preservation, income generating, growth or a combination of these objectives. As an example, PMS can be in line with the domestic growth goals, and the hedge funds can be a non-correlated asset or a volatility hedge.
• Liquidity Profile: Lock-in periods of hedge funds can be as short as 1 to 3 years, and can be permitted to redeem only quarterly or annually. Higher liquidity is usually provided by PMS, and they can exit after a period of 1-year holding in order to be eligible for the long-term capital gains tax.
• Transparency of Fee and Cost Impact: Funds such as hedge funds might impose a management fee of 2% per year and performance fee of 20% whereby a high-water mark is commonly in place. SEBI regulates the PMS charges, which are usually 1-2.5% per annum. It is necessary to know about the fee drag on net returns.
• Operational and Custody configuration: Make sure that the investment option has segregated accounts of clients, reputable custodians and audited financial statements. This acts as a shield to operational risk and the safety of assets.
   

Conclusion

Combining family office alternative investments allows you to overcome the limitations of conventional investments and seek long-term growth. These plans offer diversification, risk avoidance and professional management that will see you sail through the tricky markets. Specifically, with the strategic mix of hedge funds and PMS, you can secure capital, maximise returns, and have flexibility so that the wealth of your family will grow sustainably across generations.