Asset Allocation Strategies for UHNW Portfolios

Direct indexing with tax-loss harvesting can be highly effective when implemented properly. According to Morningstar research, from January 1999 to March 2022, systematic tax-loss harvesting through direct indexing boosted annual after-tax returns by approximately 1.04%, resulting in a 28% increase in after-tax portfolio value² compared to traditional index investing.

Hedge Funds

Traditional investors often find themselves limited to betting on stocks going up. Once you hit the UHNW level, though, you gain access to hedge funds – investment vehicles that can potentially make money in both up and down markets through sophisticated trading strategies.

However, hedge funds are not money-making machines. In fact, over the past decade, the S&P 500 has delivered annualized returns of around 12.3%, higher than most hedge funds–over a 10-year period ending in 2023, multi-strategy hedge funds generated net annualized returns of approximately 7.9%.³

So why would anyone choose hedge funds over index funds?  Firstly, their lower returns are partly due to higher fees and their focus on managing risk rather than purely chasing returns. In fact, during the 2008 financial crisis, while the S&P 500 crashed 37%, certain hedge fund strategies actually made money.⁴ Secondly, hedge funds can access unique investment opportunities and strategies not available to typical investors, such as distressed debt, merger arbitrage, and global macro trades, helping to create a more diversified portfolio that doesn’t solely depend on traditional stock market performance.

Alternative Investments 

Private Equity 

Think about the most successful companies you know – many were transformed by private equity investment long before they went public. While most investors are limited to buying stocks of established public companies, private markets offer opportunities to invest in breakthrough technologies, promising startups, or family businesses ready to scale that could become tomorrow’s success stories. 

In 2011, Sequoia Capital invested $8 million in a then relatively unknown messaging app called WhatsApp. When Facebook acquired it for $22 billion, Sequoia’s total investment of $60 million suddenly became worth over $3 billion, leading to a 50x return on their investment.⁵ Of course, Sequoia Capital took an enormous risk, but their risk paid off likely better than their wildest dreams. 

Of course, private market investing isn’t for everyone. While private equity historically outperformed the S&P 500 by 6.3% from 1990-2010, more recent data shows this premium has narrowed significantly, with private equity returning just 0.5% more than public markets in the decade leading up to September 2020.⁶ These investments often require multi-year capital commitments and substantial minimum investments and, like any investment, come with the risk of complete loss. 

Non-traditional Assets

Modern UHNW portfolios often maintain a portion of their total net worth in non-traditional alternative assets. These are those investments traditional investors don’t have access to. Here, we mean art, collectibles, fine wines, and even cars. The purpose of non-traditional assets is multiple; firstly, they generally aren’t directly linked to economic factors that affect stock, bond, and real estate prices, meaning the value of a fine piece of art likely won’t be affected by a drop in the stock market. 

Secondly, non-traditional assets generally increase in value alongside inflation. Thirdly, there is the potential to achieve significant returns as they become considered rarer or more valuable over the years. Finally, high-end, non-traditional assets provide what some may feel is the greatest value of all: prestige. Owning a collection of fine art not only reflects refined tastes but also signals to investors and peers that you possess the means and insight to secure rare and valuable assets, which may cross over into business and other investments.  

Naturally, they come with their own unique risks. They are particularly vulnerable to physical hazards, such as fires and floods, meaning your investment can be destroyed with a 100% loss of investment. If you’re considering investing in non-traditional assets, you’ll want to have an insurance strategy to help mitigate the risks associated with them. However, insurance isn’t a sure bet to protect your investment, as there’s always the chance of an asset simply losing its value. Just as an example, let’s take a Michael Jordan rookie card, which was expected to fetch $400,000 in auction in December of 2024.⁷

Current generations value rookie cards, and especially Michael Jordan’s, but will consecutive generations value them? Likely, but there is no guarantee. Also, non-traditional assets are the very opposite of liquid. It may take months, even years, to find a buyer. 

Cash Component 

Besides leaning more heavily towards alternative assets, UHNW portfolios also tend to keep more cash on hand, again, for a variety of reasons.

First, consider market dislocations. When markets take a dive, opportunities emerge to purchase stocks at discounted prices. Without readily available cash, these rare chances to acquire quality assets at depressed prices slip away. Private equity firms maintain significant cash reserves precisely for these moments – they know the best deals appear when others are forced to sell.

The structure of private market investments can also require significant cash reserves. When you commit capital to a private equity fund, they don’t take all the money upfront. Instead, they call capital over several years as they find compelling opportunities. Without adequate cash reserves, you risk defaulting on these capital calls, which can trigger severe penalties and damage relationships with premium investment managers.

Beyond opportunistic investing, cash provides operational flexibility. High-net-worth families often face large, irregular expenses – such as a sudden, high-end purchase or a sizeable tax burden. 

In Conclusion

While some of these UHNW strategies might feel out of reach today, professional guidance can help accelerate that path to when you’ll want to start considering the more advanced strategies we discuss in this article. The key is optimizing current investment approaches while building toward future opportunities – reducing investment costs, maximizing tax efficiency, and maintaining flexibility for when larger opportunities arise. At WealthGen Advisors, we combine sophisticated technology with a low-fee structure to help reduce the friction that often slows portfolio growth, positioning clients to take advantage of increasingly advanced investment strategies as their wealth grows. Ready to discuss your path toward more sophisticated portfolio management? Let’s start a conversation about your financial future–just click the button below.