Another Nudge Regarding Estate Planning

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Another Nudge Regarding Estate Planning – September 2023

Most everyone with substantial assets is aware that they should have an estate plan; yet fewer than 35% of families have Wills.

Procrastination is the most common excuse.  Some may have concluded that between today and when a Will will be called upon, their life circumstances will be so different that a Will prepared today will be a waste of money and perhaps create confusion.  Others would do it now, if they knew where to start and who to engage for assistance.  Fair enough; if you start down the wrong path or with the wrong advisor, it may become a multi-year process at considerable expense.

Finally, as a practical matter, some couples without children and an estate that is not complex, might argue that the local intestate rules align perfectly with their own wishes (although they may still face Probate).  This is a weak excuse, because putting your mind to your estate plan will almost certainly reveal complications – e.g., how is your spouse going to access that offshore bank or brokerage account quickly when the broker has never heard of them and your spouse only faintly recalls its existence?

Add in one or more children, and it is irresponsible not to have dealt with guardianship.  If you are going to go that far, why not deal with the straightforward bequests as well?

Practical Hurdles

For “high net-worth” families with complex estates, complex family dynamics and/or global assets, there is usually no resistance to seeking qualified professionals to assist them in reviewing or creating a comprehensive estate plan.

Well-written estate planning guides may be a suitable starting place.  However, families considering an estate planning exercise may be put off by suggestions or structures (e.g., trusts) that are expensive to set-up, expensive to maintain, and may still ultimately result in disputes as their family dynamics change over time.

Multiple Wills can be an appropriate response when dealing with real assets situated across differing legal systems.  Again, the cost may discourage some.

Even Family Offices, with no real financial constraints, can find it difficult to round up a team of professionals, with the relevant local expertise, that can actually collaborate and produce a final plan in a timely manner at an appropriate cost.

While this will be heresy to many advisors, it may be that many people are letting the search for a perfect solution stand in the way of at least a helpful solution.  At least chip away at it.  From an earlier post, you should at least consider having:

  • a comprehensive list of assets, accounts (with numbers, contact names / #s) kept updated and safe and within reach of your spouse / executor / beneficiary(ies);
  • a Will dealing with the major assets, even if it might leave some international rule of law questions outstanding – at least your intentions will be known;
  • Thought about practical steps outside of a Will – e.g., where appropriate, change bank / investment accounts to jointly-held or add designated beneficiaries, ensure insurance contracts are up to date, execute durable Powers of Attorney.

Take a few minutes to imagine how everything is going to work out if you were to pass unexpectedly.

Is someone going to inherent an asset with a liability (including a tax liability) without the ability to pay that tax without selling the asset.

This could happen with large real estate properties or shares in a family business.  Many countries have an inheritance tax regime.  While smaller estates are often exempted, you should consider whether your plan, or no plan, will generate significant taxes for your beneficiaries or estate.

You may have to incorporate life insurance into a trust, or identify certain beneficiaries, in order to allow the smooth transfer of assets.

Practical Problems

Even having developed a good estate plan may not be the end of it.  You need to review the plan periodically, particularly after major life events, to see that it still holds together and would meet your aspirations.

Many couples have made arrangements to avoid Probate by having all major assets, including bank accounts held as joint accounts or with a named beneficiary where applicable.  Then, in a moment of carelessness, a new account is created that is not jointly held and this, upon passing, pushes that part of the Estate into probate (if it is material) and holds up or complicates the financial plan for a period.

Older couples anticipating one or both becoming incapacitated prepare Power of Attorney’s — giving the other spouse or a younger family member broad authority to act on their behalf.  Even when properly prepared, your bank might be unprepared to accept instructions under the PoA.  Many bank employees are not well-trained in dealing with family members armed with PoAs.

On top of everything else going on with the passing of a parent, the time wasted simply getting instructions acted upon or gaining access to funds, can be very frustrating; especially when prudent planning was put in place.

If the PoA is there to protect an older family member that is at risk of become incapacitated, consider taking that person, along with the PoA, into the bank and meet the manager and explain the purposes before incapacitation occurs.

We do not provide estate planning advice and therefore have no real iron in the fire – in terms of fees or type of outcomes.  But we deal frequently with client worries and discomforts about a wide range of issues impacting what they will leave for their family.  While there are risk management approaches to dampen financial market uncertainties, risk on ultimate returns remains.  However, it would be a shame to have addressed those risks and costs that are controllable through an appropriate estate plan.

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Offshore Jurisdictions Continue to Respond to International Pressures

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Offshore Jurisdictions Continue to Respond to International Pressures – June 2023

New BVI Accounting Requirements

Due to changes to the BVI Business Companies Act, BVI holding companies are subject to enhanced reporting requirements, as of this past January.  This will include filing unaudited financial statements annually with their Registered Agent in the BVI.


The OECD began initiatives in the late 1990s, addressing tax avoidance practices of multi-national companies and some wealthy families.  Many of these practices are legal schemes, taking advantage of gaps created because different tax systems treat certain types of transactions differently.  However, due to a lack of transparency and reporting it is very difficult for national tax authorities to figure out which are legal and which are not.

In 2013, a 15-point Action Plan was adopted by the OECD, intended to create greater transparency and a better alignment amongst domestic tax regimes, especially with respect to income-producing activity that is geographically mobile.

High in importance was identifying where entities actually conducted their income (wealth) producing activities à thus Action 5, or the new economic substance rules now applied by most offshore jurisdictions.

To enhance information sharing between tax authorities, the Common Reporting Standard (CRS) was introduced in mid-2014. By 2018 most “offshore” jurisdictions had signed up to CRS.

Another initiative is the so-called BEPS program where a greater attempt to match sales with declared taxable income across countries in which a company operates.

International pressures, led by the EU, for a flatter playing field have resulted in additional amendments in domestic tax regimes.  Hong Kong recently made rather remarkable changes to how it taxes capital gains and has promised additional tinkering next year.

Those pressures have also led jurisdictions, such as BVI, to enhance transparency and income reporting.


BVI-registered companies without meaningful operations in the BVI will be required to submit a balance sheet and profit and loss statement within nine months of their financial year-end.  For a typical family-owned investment company with a December 31 year-end, this will mean the first filing is due Sept 30, 2024.

This information will not automatically be passed along to any BVI authority unless the Registered Agent is requested to provide it, and it will not be made public.  However, if you fail to file the annual statements with your Registered Agent, the Agent is required to notify government authorities.

There have been enquiries about how to prepare a starting balance sheet when historical records are not adequate (as financial statements for many of these companies may be nothing more than periodic statements from private banks over the years).

The guidance from the regulations is a little vague and as far as we know, the format for the Annual Financial Return is still being developed.

The general commentary assessment is that this financial information does not necessarily need to conform to IFRS.  Some firms are advising that for purposes of the starting balance sheet, owners assume that all retained profits have been flushed through as dividends.  For pass-through entities, that may be helpful.  It is not as straightforward for those companies holding investment assets that reflect realised and unrealised gains over the years.

However, most accounting firms tend to want to do things properly and are not going to produce weak statements, even if they do not have to provide an audit opinion.

Practical Impacts

Changes in reporting by Offshore Jurisdiction might be intended to demonstrate compliance with EU expectations without actually contributing much to international tax compliance and transparency.  However, even this might be prophylactic in nature, as companies will not know if or when their records are going to be accessed by authorities in a tax dispute — since authorities are aware those records are out there.

So, it would make sense, even if your tax planning is rather aggressive, to be thinking through now how you plan to produce these financial returns and convince yourself that you are prepared to stand behind them with documentary proof should you ever be called upon.

It also presents an opportunity to reassess why you even have these offshore holding companies.  Some families are responding by simplifying their holdings, by moving assets into a fewer number of companies.

If there were valid planning reasons to have the separate holding vehicles, then this may be an unfortunate development.

However, when asked why they are using an Offshore company to hold their investment account, some do not have a persuasive explanation.  Some do not remember, other than a vague recollection that a financial advisor once recommended it.

There has been a risk that securities issued by U.S. companies and held personally could become subject to US estate tax.  Unfortunately, the very high exemption limits available to U.S. families are not necessarily available to non-U.S. persons, which causes concerns.

The easy protection was a BVI company.  They were once cheap to incorporate and maintain, because it was easier to open and maintain bank and custody accounts in the company’s name.

Much has changed in the past 10 years.  Banks are no longer eager to maintain inactive company bank accounts.  Agent’s fees have slowly increased along with responsibilities.  Many custody banks are becoming less comfortable with offshore jurisdictions.

And now, you have the Economic Substance filings, which can be complicated, encouraging some to seek professional assistance.  These Annual Financial Reports will almost certainly require professional assistance to prepare if you are not a well-staffed Family Office.

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New Reporting Issues for Offshore Property Owners

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New Reporting Issues for Offshore Property Owners – May, 2023

If you own or are contemplating buying property in the United Kingdom (and a number of other jurisdictions) you need to consider the reporting requirements and potential tax exposures that have arisen recently. These changes are more likely to trip up long-term owners, because we assume people in the process of buying offshore property are receiving professional advice.

Some of these changes have arisen to deal with clamor pointing to foreign ownership as contributing to unaffordable housing.  Sometimes, they are accommodating demands for increased transparency on cross-border capital flows and ownership.

Registration of Foreign Ownership

The U.K.’s Economic Crime (Transparency and Enforcement) Act, which came into force in August of last year, requires the beneficial owners of non-UK corporations or partnerships (and apparently trusts) that own UK real estate to register that ownership in a public register.

We understand that January 31, 2023 was a deadline to register existing ownership.  The registration process is more elaborate and time consuming than is the process elsewhere.  If you happen to own UK property through an offshore entity, you should investigate how to get onside, in a way that is not too expensive.

In addition to rather serious penalties for failing to register, you will likely be unable to sell the property until registration is complete.

Taxes on Foreign Owners

The UK has slowly been expanding the scope of taxation of residential property held by foreign holders, entities in particular.

Since 2015, non-residents have been taxable on capital gains arising from the sale of residential properties.  In 2019, this was expanded to apply corporate income tax to the gains for properties held by offshore entities.

Even prior to that, annual taxes were due on properties held by corporate entities (the so-called “envelope” regime).

Australia has had a register for foreign ownership of residential property for some time now.

Canada recently introduced new property taxes on residential properties acquired by non-residents (with some exemptions).  Existing owners do not need to worry about this – but the trend to increased fiscal costs is worrying.

Increased Focus on Occupancy

Some countries have introduced annual taxes on under-utilised residential properties.  The rationale is a mix of discouraging keeping residences empty and dealing with absentee owners enjoying the securities of maintaining wealth in a stable jurisdiction but not contributing to its tax base.

France has an occupancy tax aimed at second homes and unoccupied homes and would capture most properties held by offshore individuals / entities.  It has clarified its occupancy tax exempts primary residences; however, it will apply to owners of other types of properties, including foreign owners and those holding property through a Société Civile Immobilière.

In addition to temporary taxes on foreign acquirors of residential property, the Canadian Federal government and a few Canadian municipalities have introduced laws targeting under-utilised (read vacant) residential properties. The Canadian government now applies a 1% annual tax on under-utilised residential properties owned by non-residents, including private companies and trusts with non-resident beneficiaries.

There are number of practical exemptions, but offshore owners of Canadian property need to be aware of the new rules and filing obligations.

The new law mandates an annual filing by owners of residential properties, if for no other reason than to claim an applicable exemption from the tax.  The annual filing will require information about occupancy.

Many popular locations for holiday properties enjoy an exemption from the tax, but you need to verify this and you may need to make annual filings.

British Columbia has had a vacant residence tax since 2018.  Sensing a fiscal opportunity as well as addressing affordability, a number of Canada’s largest cities,  have added their own 1% tax and filing requirements. (This applies to Canadian citizens as well.)   An unused condo in Vancouver could now be subject to annual taxes, determined based on value, at three levels of government, exposing the owner to additional penalties if they were unaware of these new reporting requirements and failed to file and pay taxes.

Many countries immediately restricted access to existing registers.  However, in December the Court wound back its decision somewhat by saying that anyone with a “legitimate interest” should have access.

Not all countries will interpret this in the same way, but it will likely end up with a hurdle requirement for members of investigative organisations or the press generally needing to confirm a legitimate interest prior to being given access to a filing.  Marketing groups will no longer have indiscriminate access.

The obligations to register foreign ownership of certain Australian assets beginning July 1 this year, are consistent with this tilting of the balance back towards respecting privacy while giving law enforcement adequate tools.  The information will not be public, it will be available only to Government agencies for certain purposes.


Families with assets across borders and complex holding structures now need to pay close attention to increased registration or disclosure requirements in each of the countries in which they own assets or entities with respect to a wide range of assets.

It is not just ownership registers, but new tax-related filings and reports, including those testing economic substance, and local filings with respect to ownership and use of residential or vacation properties.

Organisations such as The Society of Trust and Estate Practitioners have been active in arguing that these registers, while adequately addressing their purposes, better balance privacy and security concerns.  Recent events give hope for a better balance.

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Ownership Registries Expanding

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Ownership Registers Becoming More Common – April 2023

Many families use offshore holding companies, trusts, family funds etc., to assist with complex family structures or succession planning.  Most are not engaged in money laundering, tax evasion or other criminal activities.  However, they are increasingly being caught up in regimes created to deal with money laundering through increased transparency of beneficial ownership of real property and entities.

As a result, the unintended consequences include families having to reveal more personal information relating to wealth, beneficial ownership and location than they would like.

Families often consider privacy is important in protecting their security and reputation.  At a minimum, they will want to ensure that information that is not required to be revealed, is not revealed simply because advisors or financial institutions were careless or unfamiliar with actual requirements when providing information.


The Common Reporting Standards, intended to increase tax compliance and transparency, resulted in additional information about families with complex offshore structures being shared amongst tax authorities.  This should not have been a major concern for families that are tax compliant.

However, major releases of private information, such as the so-called Panama Papers Scandal in 2016, highlighted how much capital is hidden behind offshore structures.  Initiatives to counter offshore tax avoidance (not adequately dealt with through CRS) included encouraging offshore jurisdictions to adopt Economic Substance reporting requirements.

Of course, these are less helpful when beneficial owners are determined to maintain secrecy.

Public Registers

The logical extension was to introduce registers where the owners, especially offshore entity owners, of certain properties would be required to reveal relevant information as to the true beneficial ownership of such properties.

The UK and EU members were quite responsive to the encouragement to create public registers for the ultimate beneficial ownership of residential real estate and domestic companies.  The next stage, was to expand the registers to include beneficiaries of trusts that owned assets situated in the country.

This had the unsettling potential of making the name, country of residence, nature of ownership and birthdate of each beneficial owner available to anyone with access, regardless of the bona fides of these enquiring members of the public.

Push Back in Europe

In Q4 last year and to the relief of many trustees and private client advisors, the EU Court of Justice ruled that the public disclosure as set out in the key EU Directive, was inconsistent with EU constitutional protections for the right to one’s privacy and the right to protection of personal data.

This did not affect the existence or requirements to register, but would limit who could access the registers.

Many countries immediately restricted access to existing registers.  However, in December the Court wound back its decision somewhat by saying that anyone with a “legitimate interest” should have access.

Not all countries will interpret this in the same way, but it will likely end up with a hurdle requirement for members of investigative organisations or the press generally needing to confirm a legitimate interest prior to being given access to a filing.  Marketing groups will no longer have indiscriminate access.

The obligations to register foreign ownership of certain Australian assets beginning July 1 this year, are consistent with this tilting of the balance back towards respecting privacy while giving law enforcement adequate tools.  The information will not be public, it will be available only to Government agencies for certain purposes.


Families with assets across borders and complex holding structures now need to pay close attention to increased registration or disclosure requirements in each of the countries in which they own assets or entities with respect to a wide range of assets.

It is not just ownership registers, but new tax-related filings and reports, including those testing economic substance, and local filings with respect to ownership and use of residential or vacation properties.

Organisations such as The Society of Trust and Estate Practitioners have been active in arguing that these registers, while adequately addressing their purposes, better balance privacy and security concerns.  Recent events give hope for a better balance.

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Significant Changes to HK’s Taxation of Certain Offshore Passive Income

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Significant Changes to HK’s Taxation of Certain Offshore Passive Income – January 2023

You may have noticed media headlines warning about substantial changes coming to Hong Kong’s taxation of certain passive offshore income.

The types of income impacted, which includes dividends and capital gains, might initially concern wealth management clients.

However, these changes will not impact individuals nor those that own a HK-based company simply holding passive investments.  This note expands on the implications of these tax changes.

Brief Background

Some multinational enterprise groups (MNEs) employ ownership structures and manage affiliate distributions in such a way that business earnings originating in high-tax countries end up not being taxed anywhere.  The creative use of double taxation agreements, hybrid products and entities resident in low-tax countries or those that have adopted a territorial-based system of tax, can substantially erode the tax base in the countries where income is originally generated.

The EU, while not attacking Hong Kong’s foreign-sourced income exemption (“FSIE”) regime broadly, is concerned that entities, with essentially no real economic activity taking place in Hong Kong are not subject to passive income derived from offshore affiliates.

The EU placed Hong Kong on its “grey list” of uncooperative jurisdictions for tax purposes, in October, 2021.  Hong Kong’s administration has responded by making amendments to its FSIE regime (the Bill dated Oct 28, 2022 is referred to as the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income).  Hong Kong’s IRD has also provided an explanatory note available on its website.  Legco approved the Bill Nov 2.

Under the revised regime, certain passive income, generated by business operations conducted outside of Hong Kong, and which was not previously taxed upon being remitted to Hong Kong may become taxable if that income, or the income from which it was paid, was not taxed elsewhere.

This can include dividends, capital gains from disposals of equity interests, interest and royalties will become subject to Hong Kong’s profits tax, unless exemptions or exceptions apply.  The inclusion of capital gains on the sale of foreign shares is obviously a fundamental change in Hong Kong’s existing tax regime.

The new FSIE regime will apply to Hong Kong resident entities that are part of a corporate group that operates in more than one jurisdiction and which receive passive income in Hong Kong.  The Bill defines the type of HK-based entities that are covered; and to grossly simplify, it covers entities that are managed or controlled in Hong Kong, carry on a trade, business or service in Hong Kong and are an affiliate of an MNE group.  Accounting concepts are used to help define this affiliate status.

Individuals, local companies or corporate groups operating solely within Hong Kong are not subject to this regime.  One would not expect the regime to apply to a HK-entity that has small, passive investments in the publicly-listed shares of many foreign companies.   Entities operating under SFC licenses are exempt.

However, trusts are treated as entities. Families have set up international structures that include trusts and holding corporations, where one of those entities is resident in Hong Kong, will have to examine their structure and possible exposure to this new regime.

Specific Exemptions

The receiving Hong Kong entity will be exempt if it meets Economic Substance requirements, a concept which has been employed for a number of years now in offshore tax havens.  Whether relevant requirements are met will depend upon the activity undertaken.  But generally, if an entity is a pure equity holding company, then complying with corporate filing requirements in Hong Kong may be sufficient, assuming its human resources (actual or outsourced) are adequate.  This is not generally seen as burdensome.

If an entity is making strategic or investment decisions with respect to its assets, is managing risks and investing in more than passive equity positions, then it will not be a pure equity holding company.  However, Economic Substance safe harbours still exist, but the resources required and the quality of those resources will be heightened.  Resource requirements can be outsourced, so long as they are undertaken in Hong Kong and the entity is monitoring their execution.  Additional guidance on meeting Economic Substance requirements is expected and will be welcomed.

Even if the Hong Kong’s entity does meet the Economic Substance criteria, there is an additional set of exempting rules, broadly described as the “participation exemption”.  Exemption will generally be met if the gains or dividends, or the income from which they were paid, was taxed elsewhere in the hands of an affiliate within the MNE group, at a 15% rate (as a headline rate).

There are no de minimis exemptions, which is unusual for tax regimes designed to deal with MNE tax avoidance.

The new FSIE regime will include anti-abuse provisions; but will also include provisions to deal with scenarios resulting in double taxation.  Taxes will be subject to credits for taxes paid overseas, including withholding taxes (and in the case of dividends, on the underlying income generating that dividend).  Existing double taxation agreements will apply.  But even where a DTA does not exist, the receiving Hong Kong entity should be able to avail itself of the type of credits generally available under DTA agreements (what some are calling a “unilateral tax credit”).

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Vintage Wine Market Update – November, 2022

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Vintage Wine Market Update – November, 2022


Harvest 2022– A promising year for France.

2022 looks like a great year for French winegrowers. High temperatures and minimum precipitation during the maturing season, led to high concentration and disease prevention. Across the country, the harvest brought in ripe, healthy, concentrated grapes– although in smaller quantities than normal. Of all the wine growing appellations, Champagne will certainly offer the most spectacular wines.

2022 is noticeably a vintage where the effects of climate change are becoming more apparent. For example, temperatures in the Bordeaux region have been above the 30-year average by 1 to 3 degrees Celsius since February. The impact on winegrowing is becoming less and less negligeable.


Fine wine market

After a strong boost in September, mainly due to the weakness of the pound, the fine wine market is starting to react to uncertainties in the world. Signs of prolonged recession coupled with the lack of Chinese buyers (Hong Kong included) have led to the sense of unpredictability and led to a cooling down of the market in general.

In the past, fine wine has proven to be an effective hedge against inflation and shown that it can ride out price increase and economic storms. Will it continue to do so in the months ahead?


Auction results and trends

After 2021, a year which broke all records and a strong first half of the year, the last quarter of 2022 is showing signs of cooling down for the fine wine auction market. Most major players such as Acker and Zachys remain optimistic but latest auctions from Sotheby’s and Christie’s show a softening of demand especially from buyers in Asia. Most sales went for under their high estimates.


Focus on Champagne

According to Liv-ex, Champagne represents now 12.4% of the secondary market compared to 2% in 2012. It is the most traded fine wine region after Bordeaux and Burgundy. Like many other luxury products, Champagne seems to have benefited from the pandemic, the war in Ukraine and inflation. Over the past 2 years, Liv-ex Champagne 50 (the index which tracks price performance of the most recent vintages of the 12 most traded Champagne) has risen by 72.7%. UK and the rest of Europe represent 70% of the market followed by the US. Asia has yet to show its taste for the bubbles with only a 7.4% market share.

Vintages play an important role within the Champagne market. Among the best vintages produced lately, 2008 undoubtedly offers a premium. As proof, Louis Roederer Cristal 2008 has been not only the most highly rated Champagne this year but it has also been the most traded fine wine in 2022.

Champagne has a strong image of a luxury product reinforced by the well-known and prestigious brands such as LVMH.


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Alternative Investments Part 2 – October 2022

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Alternative Investments Part 2– October 2022

Our last post introduced Private Equity and Private Credit. This post introduces other Alternative investments.

Real Assets

This category includes real estate (e.g., residential, timberland, farming), infrastructure assets (e.g., transportation, power generation and transmission, ports), commodities or natural resources themselves, and intellectual property rights (or “intangibles”).

The primary rationale for holding real assets, and Alternatives generally, is the assets’ impact on total portfolio diversification.

Most wealthy families already own real estate as a principal, and often other, residences.  But in a discussion of Alternative assets, real estate usually refers to a broad range of real estate sub-categories including: residential housing, multi-family residences, student housing, office buildings, malls and other retail properties, warehousing and logistics and special purpose buildings.

Many jurisdictions have promoted vehicles that invest in real estate pay out most of their income to the fund holders (e.g., Real Estate Investment Trusts, or “REIT”s).  Some REITs comprise assets that are not land but rather mortgage-backed instructions or even mortgage servicing rights.

Of more recent interest to institutional and wealthy investors are investments, either directly or through PE funds, or other investment vehicles, into infrastructure assets.  These include pipelines, highways, electricity distribution, storage or export terminals; or regulated or systematically important assets such as public transit, airports and ports.

The appeal is the long-life nature of the assets, often supported by either regulated returns, or given their local importance, reasonably certain income stream. These assets are thought to produce returns that are not well-correlated with traditional equities.

“Real assets” also include art collections, wine and more recently vintage cars and sports memorabilia.  Historically, stamps, coins and noteworthy historical documents would be included as well.  These asset classes will probably remain the domain of wealthy families that have a particular hobby-type interest in the actual assets.

Hedge Funds

Hedge funds are investment pools that invest primarily in traditional assets but in ways that are different from traditional investment funds.  They may use leverage, including derivatives, or short selling to generate returns that differ from those available through conventional funds.  They may also include non-traditional assets such as derivatives, currencies or commodity exposures.

The common theme of hedge funds is the objective to generate superior risk-adjusted returns.  Those can come in the form of higher absolute returns without taking on a commensurate level of additional risk, or more commonly, to reduce volatility without sacrificing expected returns materially.  Many of these strategies, including market neutral strategies, accept that they will underperform in good markets and prefer to set absolute return objectives as opposed to compare their periodic performance against traditional asset benchmarks.

Historically, because hedge funds cannot meet the regulations applied to registered funds, they raise funds from institutional and wealthy investors privately.  In this regard, they are similar to the PE and private credit funds discussed earlier.

However, hedge fund-like strategies or exposures are now being packaged into instruments that can be sold to retail investors.  The underlying strategies may have to be somewhat modified, and sponsors may use a “feeder” vehicle into the underlying strategy.  The most common modifications give these instruments the suitable liquidity.

Just as is the case with a traditional asset portfolio, it is important to diversify an Alternatives portfolio across asset classes, managers and strategies.  Some institutional advisors believe that a hedge fund allocation should be spread across at least five managers.  This assumes the allocation would be across strategies as well.  Given the minimum subscription amounts for many Alternative funds, it becomes clear why hedge fund participation is more suitable to the very wealthy.


Because alternative investments are complex and tend not to be regulated, it is often difficult for non-professionals to evaluate the suitability of any particular fund.  Alternatives funds have wrinkles in terms of custody arrangements, potential leverage, liquidity constraints and less transparent valuation processes that much less common with traditional asset funds.  This makes it difficult for those with limited experience to select appropriate Alternatives managers and strategies.

PE firms seem to be constantly seeking additional commitments to new funds.  Unlike an investment in a traditional fund or account, PE investors will “commit”, for example, $25 million to a particularly PE fund and then wait for the PE fund to request payment.   Given the amount of dry powder held by these funds, you might have to wait a few years before the entire commitment is called.  During this wait, you may receive requests for additional commitments with other managers with whom you wish to continue a good relationship.  This constant marketing is causing some investor indigestion.

As a response to

  1. the uncertainties created by this process.
  2. the significant fees earned by PE firms;
  3. the difficulty of determining the actual returns earned by PE funds generally, and
  4. the increasing expertise, experience and networks held by advisors working directly for wealthy families (in family offices for example),

many wealthy families are sourcing and investing directly into Alternative assets; perhaps alongside a PE fund or in combination with other institutions or wealthy families.  The challenge, of course, is in sourcing attractive deals before they are picked over by the legacy PE funds.

In many financial centers such as New York, Zurich and Singapore, family offices or agencies have created formal networking and sourcing clubs, creating more opportunity for families to access more deals, on better terms while focusing on the exposures with which they are comfortable (e.g., geographical preferences or those based on responsible investing, or length or size of the commitment).


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Alternative Investments Part 1– September 2022

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Alternative Investments Part 1– September 2022

Over the past 10 years, one of the most significant developments in terms of investment allocations amongst the very wealthy has been the huge growth in their allocation away from traditional products into alternative assets and strategies.  However, due to practical and regulatory issues, retail investors are unlikely to be involved in investment products or strategies beyond the traditional.  This is first of two posts which attempts to introduce the “Alternatives” space; but we are not recommending any particular investment approach with respect to Alternatives, nor exploring issues such as historical returns and appropriateness.

“Traditional assets” refer to publicly traded equities, bonds and cash, both in segregated form or bundled into funds that trade or offer regular (usually daily) redemption opportunities.

Alternatives” can be divided into two broad categories.  First are private assets – generally any investable asset that is not a traditional asset.  This includes private equity, private credit, infrastructure assets and real estate.  [Private meaning issued by companies that are not publicly traded and have therefore generally not made public detailed operating and financial information.]

Second, are strategies or funds that use short selling or leverage and other strategies not normally seen in traditional funds.  The entities managing these strategies are often referred to as “hedge funds”.

Investment vehicles offering Alternatives tend to have the following attributes:

  • are less liquid, less regulated and require a larger minimum commitment that is usually the case with traditional investments;
  • the underlying assets have a return profile that is not highly-correlated with traditional assets, or
  • the underlying assets are traditional assets, but the strategy generates return or risk characteristics that are different from those of traditional assets, perhaps through leverage or complex trading strategies, or
  • The returns from the underlying assets are structured to provide different risk return profiles to different investor groups.

We see more non-traditional assets and strategies becoming available to retail investors, perhaps because:

  1. the proportion of Alternative assets within institutional client portfolios has exploded, raising their profile and public awareness, encouraging asset managers to replicate strategies or access to asset classes for a broader pool of investors;
  2. many retail investors are wealthy, and non-traditional assets could likely serve a useful purpose in their total portfolio; and
  3. the increased use of computing power has reduced the scale required to profitably manage certain strategies.

Alternatives are often considered exotic, high-risk strategies reserved for the very wealthy, who can afford to suffer significant losses.  However, many Alternatives are designed to reduce risk and could be appropriate in many portfolios.

For example, many family offices are more concerned with preserving capital and earning a reasonable return, than with maximizing returns on that capital.  They are prepared to give up some of the potential upside to generate steadier returns over time.

Private Equity

Private equity (or “PE”) funds originated as funds that purchased shares of public companies for the purpose of taking the company private.  This was achieved sometimes via a hostile take-over or working with existing management (often referred to as a Leveraged Buy-Out, or LBO).

PE funds tend to use significantly more debt than is typical for a public company and bring more intensive or aggressive management to the business, with the intention to increase its profitability, extract capital and one day sell (to a strategic buyer, other PE firm, or take public in an IPO).

Over time, due to perceived superior returns, PE firms have built enormous capital pools and have expanded their range of investment strategies.  They have funded platform-based industry roll-ups, activist approaches, minority positions in growth companies and managing the premium pools of acquired insurance companies.

The term private equity could also refer to Venture Capital and Growth Capital, because these investments are made prior to a company going public.  Growth Capital, is invested at later stage than is VC; typically once a start-up has established its business model and is growing revenue but wishes to remain private for longer.  More than 50% of the funds deployed by PE firms in 2021 could be described as Growth Capital.

PE firms are estimated to have $3.4 trillion of committed but unallocated capital, with approximately a third of that in buy-out funds.   Despite much slower capital markets year-to-date 2022, the PE firms are reportedly still raising record levels of funds, with financial advisors estimating that the ultra-wealthy Family Offices continuing to increase their over-all asset allocations to PE.

Private Credit

Historically, large companies could borrow by selling bonds to institutional investors or borrowing from banks.  Over time, adjacent lending markets have developed to exploit opportunities around these two main pillars.

After the 2008 financial crisis, Regulators raised the cost of risk taken on by banks through higher regulatory capital and buffers and new reporting standards.  This caused banks to pull back from some credit markets tending to push costs higher in those markets.

The higher returns on offer drove capital into the private credit space.  Credit funds, some sponsored by existing PE firms, raised billions to make available to companies that could not easily access the senior lending bank market or public bond markets – due primarily to size but perhaps a combination of size and credit quality.

The rationale for this enlarged private credit market is that:

  1. Diversifying a total portfolio, especially those heavy to equities and investment grade debt;
  2. With bank lending cut back, there were more opportunities to lend to borrowers with adequate credit quality than was previously the case;
  3. Central bank liquidity expansion had materially reduced yields on conventional investment grade bonds to the level that return expectations at many institutions could not be achieved, whereas the private credit market offered returns above 6% without unreasonable risk;
  4. Leveraged lending (like all bank lending) is typically floating rate, which appeals to many investors; and
  5. As a market perceived as local, illiquid and perhaps inefficient (e.g., lack of credit ratings and publicly-available financial information), the narrative developed that returns relative to risk taken could be attractive across the business cycle.


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Vintage Wine Market Update – July, 2022

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Vintage Wine Market Update – 2022 July

As discussed in our update last November, 2021 was undeniably a challenging vintage.  It has become known as the miracle vintage as the savoir-faire of winemakers made all the difference.   If one knows where to look, there will definitely be some very tasty bottles to buy.  This vintage is often described as aromatic, fresh, low in alcohol and well balanced.  White wines are showing very well across all appellations.

2021 is also a vintage where properties with financial resources played a decisive role.  Chateaux had to invest both money and labour into a vintage that in the end produced very low yield.

With the en-primeur campaign now drawing to a close, it is fair to say that, in general, the 2021 vintage for Bordeaux does not offer value for money and did not attract excited buyers.   Save for a few of the best wines such as Carmes Haut-Brion, Cheval Blanc, L’Evangile, Figeac, which might offer potential increase in value, the rest offers little financial interest at this stage.


Fine Wine Prices Continue to Increase

Prices continue to increase, despite an initial sudden drop at the beginning of the COVID pandemic Liv-ex indices have maintained their steady climb.   In 2021, the Liv-ex 100 (100 of the most sought-after wines on the secondary market) rose by 22%.  Since our last report, Liv-ex Champagne 50 and Burgundy 150 prices have risen an additional 9% and 14%, respectively. Italy and California wine prices also continued their steady climb.

Increased global wealth, coupled with wine-drinking being perceived as one of the few authorized pleasures during prolonged COVID-related social restrictions and lockdowns, led to a surge of interest in fine wine.

A new and increasingly important factor pushing up prices is the effect of climate change on wine production.   Burgundy, for example, already known for its smaller crops, has been heavily impacted by a combination of hotter, dryer growing seasons and extreme climatic incidents such as destructive hail or late frost.


Auction Market

Despite the pervasive social restrictions due to the COVID pandemic, global auction revenues increased more than 50% from 2020.   2021 was, by far, the best year in terms of sales for auction houses, big and small, with revenues from live and online wine auctions reaching USD 582 million.  2022 looks to be another promising year, with the major auction houses such as Acker, Sotheby’s, Christie’s and Zachys already recording increased sales in Q1.  Acker, the largest in terms of revenue over the past two years, forecasts a further increase of 8-10% this year.


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Currency Fluctuations

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Click here for the introduction to our “Investing in the Post-Covid Era” series of materials.

Currency fluctuation is an ever-present factor that investors should take into account.

We have come a long way since pre-Bretton Woods, but there remain serious challenges for investors and portfolio managers in dealing with currency fluctuations.

Currency exchange rates fluctuate constantly, impacted by many economic and sentiment factors. These can be exacerbated by a country’s poor economic policies, its exposure to increasing commodity prices and reversing capital flows from foreign investors.

Nearly all Central Banks have been or are about to start raising interest rates significantly, with the view to moderating inflation by tightening financial conditions.  Historically, tightening financial conditions has impacted some economies, particularly emerging economies, more than others, including by triggering significant foreign exchange rate volatility.

Our comments will focus on the role currency selection and the associated risks may play in your own personal investment decisions.


There are many economic factors that lead to the strength or weakness of one currency versus another. A nation’s trade, current and capital accounts, and its government’s fiscal and monetary policies, including the local-currency yield curve, are important factors.

For example, a country experiencing a decline in its currency may see increased exports of locally produced goods or services. A country can support its currency by raising local interest rates.

During periods of calm, investors often move funds from low interest rate countries to higher interest rate countries.  However, during periods of heightened uncertainty, investors unwind carry-trades or seek safety in securities in currencies perceived as safe, such as US dollars, Swiss Francs or the Japanese Yen.

Of course, economic analysis is unfortunately never that simple — multiple factors, both internal and external, simultaneously impact a country’s currency movements, with some tending to have short-term impacts and some are felt longer term.

Minimize Currency Effects

While foreign exchange risks are only some of the many risks to which your investment portfolio is exposed, there are ways that professional managers mitigate or avoid these risks.  They may manage foreign exchange exposure to match clients’ liabilities, or they may hedge certain exposures, or they may diversify appropriately.

Professional advisors and economists also use various models or theories to help forecast currency movements, e.g., the purchasing-power parity theory. These models incorporate many factors mentioned above and include interest rate differentials, relative economic strength and inflation expectations.

Your Investment Objectives

If you need regular income from your investment accounts, then the currency mix chosen for your investments should match up well with the currency or currencies in which your expenses are based.  For example, if you are retired in the United States, then you would be more comfortable with a significant portion of your portfolio producing a USD income.

However, your specific objectives might be best met by a good, internationally-oriented, discretionary investment manager. Your currencies exposure would be directly related to your specific asset allocation.

A good portfolio manager will include currency-related risks when assessing investment opportunities.  For example, currencies are a relevant factor in determining a company’s cost structure and competitive position.

Currency implications are unlikely to drive investment decisions or portfolio construction, but we suggest that these issues be included in discussions with your financial advisor when evaluating returns or matching your portfolio parts with your long-term financial objectives.


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