Alternative Investing Strategies for The Family Office

D. Nathan “Nate” Reichard’s family made its money the old-fashioned way – in construction.

A&R Mechanical Contractors which Reichard’s great grandfather, launched in an Urbana, Ill. garage 96 years old, is one of central Illinois’ leading construction services companies.

Reichard, 38, is managing his family’s wealth, with an emphasis on private real-estate investments. But he’s also intrigued by the role that cryptocurrency and other digital assets can play in diversifying an investment portfolio. Thus far, he has made modest investments in both Bitcoin and Ether – the two leading digital currencies.

“It’s a way to hedge against the dollar and the manipulation of fiat currencies,” says Reichard. “Right now, we are soft-stepping our way into this area.”

Though wild swings in the value of cryptocurrencies gain headlines on a regular basis, the outsized volatility hasn’t stopped family offices in recent years from making investments in Bitcoin and other digital assets.

Some family offices – including ones run by the Winklevoss twins, Tyler and Cameron, and former Goldman Sachs partner Michael Novogratz – have made bets on digital coins and companies tied to blockchain (the electronic ledger that underlies cryptocurrency)  a major component of their investment strategy.

Even investment legend Paul Tudor Jones, who has a family office, has said he’s an investor in Bitcoin, adding that he’s impressed by the “enormous contingent of smart, sophisticated people” globally who are bullish on it. “It’s like investing early in Steve Job’s Apple or Google,” he said in a CNBC interview last fall. Even after a recent one-day 30% decline on May 18, a single Bitcoin was still trading at roughly $30,000, which is more than triple its price a year earlier. 

For the most part, however, the family offices that have invested in digital assets are just placing a toe in the water, viewing these investments as simply one more way to the diversify portfolios from stocks, bonds and other more traditional alternatives such as private equity and hedge funds. Reichard, for example, isn’t willing to place more than one percent of his family’s portfolio in cryptocurrency. 

While investments in digital art and other collectibles through holding non-fungible tokens (NFTs) haven’t caught on yet among family offices, it’s a possible next step in the evolution of family office investment.

Like the big institutional investors they often look to for guidance, family offices are students of modern portfolio theory. And by that thinking, an investment in assets uncorrelated to fiat currencies or traditional stock and bond markets have a certain appeal.

“It’s important to find investments that reduce your correlation to other asset classes and Bitcoin only has roughly a 0.35 correlation to the S&P 500,’’ says Nate Wasson, a managing director with the family-office advisory unit of Boston Private, a wealth management firm.

Wasson’s unit at Boston Private serves as a “multi-family office,” essentially helping single-family offices around the country manage their money.

Wasson also believes that digital coins like Bitcoin and Ether have the attributes of being both a “store of value” – meaning that they can be saved and retrieved as a later time – and increasingly as a means of paying for goods and services.

He thinks that digital currencies may eventually serve the philanthropic  needs of wealthy families – by allowing them to make donations free of costly transaction fees to areas of the developing world with limited access to traditional banking systems.

Wasson says that there is no easy answer to the question on what percentage of a family office’s investment assets should be devoted to cybercurrencies and other digital assets. Much depends on a family’s risk tolerance and liquidity needs. For most families, it may be in the low-single digits, but could potentially be higher.

No doubt, much of the impetus for family-office forays into cyber investments is coming from the younger generation of digital natives. But Wasson has also found that family members in their 60s and 70s see a fundamental investment rationale for this class of investing. “They want to make sure that the family offices are prepared for the future and that preparedness mentality really drives the discussion,” he says. 

But thus far, he’s not pushing his clients to invest in digital collectables through non- certificates of ownership called NFTs, even though this topic has received attention in the press recently.

He also draws a clear distinction between more established cybercurrencies such as Bitcoin and Ether and flavors of the month like Dogecoin and even a new one called $SCAT issued by Carole Baskin, the owner a Florida-based  big-cat sanctuary and a star of Netflix’s break-out series, “Tiger King.”    

Wasson points out that many families might be interested in gaining exposure to cybercurrencies through financial-equivalent assets such as Grayscale Bitcoin Trust (GBTC), a closed-end fund and the largest investment vehicle for buying Bitcoin through a stock brokerage account. The fund’s owner, Grayscale, has plans to  convert GBTC from a closed-end fund to an ETF,  which should increase its popularity among investors because the shares will trade at par to their net asset value.

For many investors, gaining exposure to Bitcoin through a traditional and familiar brokerage account might be preferable to opening up a special cryptocurrency account with a new platform such as Coinbase.

But Wasson cautions that investors need to recognize that a financial asset tied to Bitcoin is no substitute for the real thing. “It’s important for families to understand the risks of holding a derivative asset,” he says.

Still, others suggest that family offices might want to broaden their view of digital investing to embrace the many private and public investments tied to blockchain and related technologies.

“Many big institutions now see blockchain as comparable to an investment in the Internet in the 1990s whereas investing in an individual cryptocurrency is like investing in a single Internet stock like Netscape,” says Martin Litvak, an estate-planning lawyer who advices family offices. ”So Netscape may not exist anymore but the Internet will always exist. Blockchain is a technology that will improve any commercial activity and disrupt all industries, from logistics and healthcare to financial services.”

Reichard, for now, is staying put with his modest investment in cryptocurrencies but is open to learning more about expanding opportunities in digital investing. “We have been doing a lot of research with various family office forums to understand what we would be investing in and what we should be thinking about.”

 

John Kimelman is a veteran financial journalist based in New York City.  He has served as an editor on the staffs of Barron’s, CNBC.com, and American Banker.