Private banks and wealth managers said that wealthy investors and family offices have been reducing their stock holdings and turning to private market investments such as private equity for more than a year prior to the recent stock market volatility, as they are concerned about the overheating of the technology stock market.

According to a survey by UBS Family Office, private equity accounts for 35% of the investment portfolio of family offices, the largest share of all asset classes, while stock investments account for only 28%. A survey by Deloitte also found that the proportion of family offices holding stocks dropped from 34% in 2021 to 25% in 2023, while the proportion of private equity investments rose from 22% in 2021 to 30% in 2023.

According to several advisors, wealthy investors did not panic when global stocks plunged on Monday, with the S&P 500 and Nasdaq down 3%, and did not rush to buy into the dip. They were more concerned with understanding the reasons for the market changes than taking immediate action. At the same time, they saw last Friday and Monday's stock price declines more as opportunities for tax planning and estate planning.

The wealthy are not in a hurry to buy the dip.

For example, BBR Partners' clients, most of whom have hundreds of millions or billions of dollars in wealth, tend to remain cautious in the face of short-term market fluctuations. BBR Partners' partner Sean Apgar said,

"Clients often ask what's going on? This kind of question is more out of curiosity about the market than a desire to take immediate action."

"BBR provides consulting services for super-rich clients, who, due to their long-term investment plans, usually do not react to short-term market fluctuations. But they do want to understand market trends, yen arbitrage trades, increasing concerns about economic downturns and the possibility of interest rate cuts."

"My clients' investment strategies remain the same."

"What clients should do now is to remain calm and confident in the investment plan we formulated together a long time ago, which has taken into account expected fluctuations and market adjustments."

As global stocks plunged, opportunities for tax planning and estate planning emerged for the wealthy.

Not only that, last Friday and Monday's stock declines provided many wealthy investors with opportunities for tax planning and estate planning. William Sinclair, head of JPMorgan Private Bank and US Family Office business, said more and more clients were choosing to use "separately managed accounts," which are separate accounts specifically designed to hold certain assets or stocks and offer a high degree of privacy. Through SMA, clients can reduce their tax burden through a tax-loss harvesting strategy.

"Tax loss harvesting" is a common tax strategy, especially in times of high stock market volatility, where investors can operate as follows:

Sell the losing stock: When the stock price falls and incurs a loss, investors can choose to sell these losing stocks. The purpose of this is to achieve a "capital loss."

Offset income with losses: This capital loss can be used to offset the "capital gain" generated by other profitable stocks in the investment portfolio. In this way, investors can reduce their net capital gain and thus reduce the capital gains tax they need to pay.

Buy back stocks: After selling losing stocks, investors usually buy back the same or similar stocks at an appropriate time to maintain their investment position. This operation enables them to reduce their tax burden while not losing their long-term hold of these stocks.

Since the average market capitalization of large U.S. technology stocks has fallen more than 15% in the past month, wealthy investors are taking advantage of market volatility to optimize their tax situation while maintaining the integrity of their investment portfolio. Sinclair said, "Tax-loss harvesting is the biggest capital inflow for taxable clients."

Some wealthy people also use price fluctuations for estate planning. Under current U.S. estate and gift tax rules, married couples can transfer up to $27.22 million in assets to heirs and family members, while individuals can transfer up to $13.61 million. These tax-free amounts will expire at the end of next year, so many wealthy investors are seizing the opportunity to maximize the rule and transfer assets to their descendants.

When stock prices fall, giving stocks as gifts is more advantageous, as it allows investors to give more shares of stock within the tax-free amount. When these low-priced stocks are given to the next generation, assuming the value of the stock recovers and rises again in the future, the appreciation portion of these stocks will no longer be included in the estate or gift tax calculation. Therefore, investors effectively transfer the future appreciation part to the heirs without paying additional taxes. This strategy is particularly important as the tax-free amount is about to expire, so tax consultants encourage investors to take advantage of this time to plan.

BBR partner Apgar explained:

When the market price of a stock falls, assuming a stock originally worth $100 is now only worth $80, investors can choose to pass on the stock to the next generation at this low price. This way, you take advantage of the current undervaluation. Tax advisors are often excited about this market environment because it opens up new opportunities for estate planning and tax optimization for clients.

Entrepreneurs and executives use complex hedge strategies to reduce holding losses.

Due to the high concentration of wealth in the company's stock, founders and executives are more sensitive to recent market fluctuations. In order to deal with the large fluctuations in the company's stock price, financial advisors typically help these executives and founders design complex hedging strategies, such as variable prepaid forward contracts and exchange fund strategies, to protect their wealth from the impact of major stock price drops. The recent stock market decline has highlighted the appeal of "collaring structures" strategies to these founders and CEOs.

"Our clients are aware that their jobs and careers are closely related to the company's stock. Therefore, they need to pay special attention to managing risks and optimizing wealth through financial planning," said Jennifer Povlitz, head of UBS Wealth Management Americas.

The long-term investment trend of super-rich individuals is to buy shares in private companies directly and put pressure on management, similar to what Warren Buffett does.

Despite rising by about 10% this year after a 24% increase in 2023, the S&P 500 index, many family offices and super-rich investors continue to shift funds to alternative investments such as private equity. Many of them believe that private companies are more stable and profitable in the long run than stocks, especially after experiencing a major stock market drop like Monday's. In addition, by holding shares of private companies directly, they can exert greater influence on the company's management.

Geoffrey von Kuhn, who provides consulting services to some of the largest family offices in the United States, said: "Most family offices invest in alternative investments, hedge funds, private equity and real estate, so they usually do not adjust their investment portfolios frequently."

Richard Weintraub, head of Citigroup's private banking family office in the Americas, said that family offices are directing funds to long-term investments that can span decades or even generations with less volatility. In addition to private equity and venture capital, a major trend for family offices is to buy shares or control of private companies directly.

"Large family offices with assets of more than $10 billion are investing in operating companies that they can hold permanently and pass on from generation to generation, similar to building a Buffett-style investment model. The recent volatility in the stock market has further strengthened their ideas of shifting to private investments," said Weintraub.

Michael Pelzer, head of investment at Bank of America Private Bank, pointed out that compared with family offices, high net worth individual investors still have room for improvement in their participation in private markets and alternative investments. "Overall, I don't think high net worth investors are allocating enough to alternative investments. We see this market volatility as a catalyst to help high net worth investors expand their investment portfolios. I think that after this week, investors will be more open to alternative investments, whether it's private equity or real estate," he said.

Advisors believe that in the current investment environment, high net worth investors are most concerned about geopolitical risks and government spending. Jimmy Chang, chief investment officer of Rockefeller Global Family Office, revealed that client inquiries are not focused on stock market volatility, but more on the potential impact of government debt and deficits.

"Overall, I think high net worth investors are under-allocated to alternative investments. We see this market volatility as a catalyst to help high net worth investors expand their investment portfolios. I think that after this week, investors will be more open to alternative investments, whether it's private equity or real estate," said Michael Pelzer, head of investment at Bank of America Private Bank.

Advisors believe that in the current investment environment, high net worth investors are most concerned about geopolitical risks and government spending. Jimmy Chang, chief investment officer of Rockefeller Global Family Office, revealed that client inquiries are not focused on stock market volatility, but more on the potential impact of government debt and deficits.