> The standard passive indexing approach used by middle class individuals scales in a cost-effective manner to the billions of dollars of assets
Family offices are more like endowments and follow similar strategies that will have a portfolio that includes a mix of public equities, bonds, private equity, hedge funds, and real estate. Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds.
In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. It took 8 years for the S&P 500 to recover from the dotcom crash and 6 years for the 2008 crash.
>Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds.
They can also provide worse returns. You don't know which. You can guess that they'll provide average returns, because the average investment gets average returns. After all, not everyone can be above average.
Passive indexing guarantees average returns. Before costs, that is. So not only is the indexing approach cheaper, but it's also safer.
>In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that.
Quite the opposite, IMO. If you do something straightforward like dump 100% of that into the S&P 500 and spend the dividends, you're looking at something like $1.8 million this year. Less in a downturn, of course, but that's still pretty difficult to spend.
And if you have known large expenses, fixed income is really efficient at guaranteeing you the money needed to meet those expenses.
> They can also provide worse returns. You don't know which.
You do. That's the whole point. If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years. Yale is a great example of this; over the last 20 years their average returns are 12% which is 50% more than what an index did (7-8%):
>If you invest in a basket of top tier VC and PE funds, they will destroy indexes over the next 10 years.
I'd happily do a total-return swap of the S&P 500 against any basket of VC and PE funds you'd care to name that are currently accepting new investments. Assuming, of course, that there's some reasonable way of collateralizing and settling things at the scale I'm willing to risk ($10k notional), which I honestly doubt.
If beating the market was that easy, then everyone would do it. So either the top tier funds become closed to new investment after becoming top tier, or they stop over-performing for idiosyncratic reasons, or something. I'm using outside view logic here, I really don't care at all for the stories they tell. It's honestly downright dangerous to pay too much attention to the marketing material of investment funds - after all, Bernie Madoff consistently showed 11% annual gains. At the end of the day, the average investment must achieve average returns.
> If beating the market was that easy, then everyone would do it.
It's not easy. You need $100m+ of capital and a long time horizon to implement it. Very, very few people have that. It's less than 0.0004% of the population.
Family offices are more like endowments and follow similar strategies that will have a portfolio that includes a mix of public equities, bonds, private equity, hedge funds, and real estate. Many of these investments are illiquid and have long holding periods, so aren't available to normal investors but can provide much better returns than index funds.
In addition, when you have >$100m in wealth, consistent, predictable returns become very important and index funds don't give you that. It took 8 years for the S&P 500 to recover from the dotcom crash and 6 years for the 2008 crash.