Blueprint for Resilience: Strategic Asset Allocation

What Is Strategic Asset Allocation?

Strategic asset allocation (SAA) is a long-term investment approach that defines the optimal mix of asset classes—such as equities, fixed income, real estate, and alternatives—based on an investor’s objectives, risk tolerance, and time horizon. Unlike tactical allocation, which reacts to short-term market conditions, SAA establishes a target portfolio structure and maintains it through periodic rebalancing. The goal is to create a disciplined framework that aligns with expected returns and risk over time, ensuring consistency regardless of market volatility.

SAA serves as a long-term compass rather than a rigid rulebook. It sets the strategic mix of asset classes that aligns with your objectives and risk tolerance, but in practice, portfolios rarely sit exactly at those target weights. There are two main reasons for this:

• Short-Term Views and Tactical Tilts: Investors often adjust exposures based on near-term market conditions, such as overweighting equities during a growth cycle or holding more cash in periods of uncertainty. These tactical decisions create temporary deviations from the strategic mix.

• Practical Constraints—Especially in Private Markets: Rebalancing into or out of private markets is not instantaneous. Commitments to private equity, real estate, or private credit take time to deploy and even longer to realize. As a result, allocations to illiquid assets often lag behind targets, and achieving precise weights may be impractical without disrupting the portfolio’s overall integrity.

The key is to treat SAA as a reference point for discipline and governance, not a daily target. Over time, the portfolio should trend toward the strategic mix, but flexibility is essential for both market realities and operational constraints.

It is, however, a good idea to have the tools and processes to determine whether your short-term views are improving returns and/or reducing risk.

Why Should a Family Office Implement a Strategic Asset Allocation?

For family offices, strategic asset allocation is more than an investment framework—it’s a cornerstone of preserving and growing wealth across generations. Intergenerational wealth faces unique challenges: varying risk appetites among family members, evolving financial goals, and the need to withstand market cycles over decades. A disciplined allocation strategy provides stability, reduces emotional decision-making, and ensures that the portfolio remains aligned with long-term objectives rather than short-term market noise.

By defining a clear mix of asset classes and rebalancing periodically, family offices can manage risk effectively while capturing growth opportunities. This approach also supports governance, as it creates a transparent structure for decision-making and accountability.

Suitable Time Horizon for Intergenerational Wealth

Strategic asset allocation for intergenerational wealth typically spans multiple decades—often 20 years or more, reflecting the multi-generational nature of family capital. Within this horizon, allocations should account for liquidity needs, legacy planning, and inflation protection. For example, equities and private markets often dominate the growth component, while fixed income and cash provide stability and liquidity. Alternatives such as real estate or hedge strategies can add diversification and resilience.

Governance of Strategic Asset Allocation

Without strong governance, even the best-designed SAA can fail in execution. Governance is critical to the success of a family office's investment function, including the strategic asset allocation framework. A robust governance structure ensures that the allocation strategy is implemented consistently, monitored effectively, and adapted when necessary without compromising long-term objectives.

Key elements of SAA governance include:

• Investment Policy Statement (IPS): The IPS serves as the foundation, outlining objectives, risk tolerance, asset class ranges, and rebalancing rules. It provides clarity and accountability for all stakeholders.

• Decision-Making Framework: Clear roles and responsibilities—such as an investment committee, advisors, and family representatives—help prevent ad hoc decisions and maintain discipline.

• Monitoring and Reporting: Regular performance reviews against benchmarks and risk metrics ensure transparency and allow timely adjustments within predefined parameters.

• Rebalancing Protocols: Governance should define when and how to rebalance, whether based on time intervals or deviation thresholds, to keep the portfolio aligned with strategic targets.

• Adaptability: While SAA is long-term, governance must allow for periodic reassessment in response to major changes in family objectives, liquidity needs, or market conditions.

Strong governance not only protects the integrity of the allocation but also fosters trust among family members, reducing conflicts and ensuring continuity across generations.

Start with the Outcome Before Touching a Model

Every robust Strategic Asset Allocation begins with a clear statement of what you’re optimizing for—and how you define risk.

Typical Objectives

• Preserve and grow real purchasing power over generations.

• Support the family’s annual financial needs (e.g., 3–5% of portfolio value) with high confidence.

• Maintain liquidity for capital calls, taxes, and opportunistic deployment.

Choosing a Risk Definition

• Volatility (Standard Deviation): Measures total return variability. Simple and widely used in institutional policy work—but penalizes upside and downside equally and assumes normal return distribution.

• Downside Volatility (Semi-Variance): Focuses only on negative surprises, aligning more closely with investor psychology and spending risk.

• Max Drawdown / Drawdown Control: Captures peak-to-trough loss and recovery time—the most intuitive pain metric for families funding ongoing commitments.

Why pick one over another?

• If your primary constraint is annual spending stability, downside risk or drawdown may be more appropriate than volatility.

• If your governance anchors to policy bands, tracking error, and benchmark reports, volatility can be convenient and comparable.

• Many investment committees blend these views, using volatility for policy setting and drawdown for stress tests and guardrails.

Which Asset Classes?

When building out your strategic asset allocation framework, consider:

• Which asset classes can you realistically access? Can you access private markets?

• Do you have sufficient data to incorporate the asset class into your framework?

• Should you consider style factors in addition to traditional asset classes?

• Should you use actively managed funds or a passive approach? (Private markets require an active approach.)

Inputs, Models, and Complexity

All models require inputs—historical data, assumptions (such as expected return), and the investment outcome you’re optimizing for. Here are common approaches:

Capital Market Assumptions (CMAs): Getting Expected Returns Right

Developing robust long-term forecasts is critical—even if your model doesn’t require CMAs. Common approaches:

• Historical Returns: Simple but ignores current valuations.

• Building Blocks: Combine dividend yields, earnings growth, and repricing.

• Valuation-Aware: Adjust returns by current valuations.

• Scenarios/Simulation: Monte Carlo or regime-based models for fat tails and shocks.

Institutional providers increasingly link CMAs across assets and macro variables, include private market assumptions, and use robust optimization. Many publish CMAs for free, but applying them effectively requires resources.

What About Private Markets?

Incorporating private markets is challenging due to limited data and illiquidity. Solutions include:

• De-smoothing Benchmarks: Use public market equivalents and interpolation (e.g., Geltner method).

• Valuation Challenges: Deal-level data is ideal but often inaccessible.

• Access Issues: Benchmarks exist but are not investable—raising the question: if you are a passive investor, how will you access the asset class?

Policy Design: Constraints, Liquidity, and the “Spending Engine”

When converting CMAs into a policy mix, consider:

• Liquidity Tiers: Match illiquid commitments with liquid diversifiers and a cash sleeve for spending and capital calls.

• Fixed Income’s Role: Duration and quality matter for shock absorption.

• Documentation & Cadence: Define ranges, rebalancing rules, and review frequency in the IPS.

Illustrative Strategic Target Allocation Mix (For Education Only)

A family office with a multi-decade horizon, volatility target of 10%, and moderate liquidity needs might include:

Notes:

This is a generic illustration, not advice. Real policies vary with spending rules, drawdown tolerance, tax posture, governance, and access to managers.

Ready to Develop Your Framework? 

Implementing a strategic asset allocation framework can be daunting. At Hext Point™, we can help you design tools for an institutional-grade framework. Combined with portfolio reporting and analytics, you’ll be positioned to achieve your desired investment outcomes.

Coming up next on the Hext Point™ series

1. Tactical Asset Allocation (TAA): How to add structured, valuation‑aware tilts and macro overlays.

2. Private Markets Investing: Building and pacing private markets investment programs.

Disclaimers

This article is for informational and educational purposes only. It does not constitute investment advice, an offer, recommendation, or solicitation to buy or sell any security or strategy. Examples are illustrative and not tailored to your circumstances. Past performance is not indicative of future results; all investments involve risk, including possible loss of capital.

Hext Point™ does not have any commercial relationship with any providers mentioned, is not endorsed by them, and does not endorse them.