How does a multifamily office measure portfolio risk, stress scenarios, and drawdowns?
A multifamily office combines exposure, sensitivity, volatility, value at risk, liquidity, concentration, stress tests, and drawdown analysis. The goal is to see how the whole portfolio may behave in normal markets and severe, plausible conditions. We compare results with the family’s liquidity needs, time horizon, and agreed risk limits, then review changes regularly.
Start with exposures and risk drivers
We first map every holding, account, manager, and liability into a common view. That shows exposure by asset class, region, currency, issuer, sector, manager, and strategy. We also identify leverage, derivatives, lockups, and cash needs. Concentration can hide inside several funds that own similar securities, so we look through to the underlying risks where data allows.
Next, we measure sensitivity to key factors. Examples include equity beta, bond duration and convexity, option delta, gamma and vega, currency exposure, and credit spread sensitivity. These measures help show how a portfolio responds when a single risk factor changes.
Use several risk measures together
No single statistic explains portfolio risk. Volatility summarizes the variability of returns, while value at risk estimates a loss threshold under stated assumptions and a stated time horizon. Both depend on data and model choices, so we pair them with factor exposures, liquidity information, and concentration reports.
We also compare actual results with the portfolio’s policy targets and risk limits. A risk report should explain what changed, which positions contributed, and whether the result came from markets, allocations, manager decisions, or currency movements. For complex portfolios, we review risk at the security, manager, asset class, and total portfolio levels.
You should not typically diversify heavily in the direct investment space. You should always be very careful and do very thorough due diligence. Warren Buffett says, put your eggs in one basket and watch that basket very carefully. You should probably build a platform or two.
Stress scenarios and drawdowns
Stress testing asks what could happen under a defined shock. Scenarios may combine falling equities, wider credit spreads, higher interest rates, weaker currencies, lower real estate values, and reduced liquidity. We use sensitivity analysis, scenario analysis, and reverse stress testing to examine material risks under severe but plausible conditions.
Drawdown measures the decline from a previous portfolio peak to a later low. We track the current drawdown, the largest historical drawdown, the time to recovery, and the assets that caused the decline. We then test whether cash reserves, rebalancing rules, and spending plans remain workable. Stress results are estimates, not forecasts, so we record assumptions and review them on a defined schedule.
Related guides
- Access to Alternatives Through an MFO: A Practical Guide for Families
- Cross-Border Families and Multifamily Offices: A Practical Guide
- Family Governance With a Multifamily Office