Agile business entrepreneurs that successfully generate substantial wealth through their companies are not always so nimble when it comes to diversifying their personal wealth or reducing their exposure to financial risk in the event of a business slump or market downturn.
According to Kenneth Ho, head of products for Julius Baer in Asia-Pacific, a growing number of Asia's wealthy business owners have a high proportion of their wealth tied up in their own businesses which prohibits them from lessening financial risk or seizing opportunities to develop a diversified investment and wealth management portfolio.
He says business entrepreneurs are often too involved with building their companies and managing their day-to-day operations to manage their personal finances. In other cases, company founders have taken their businesses public, which means their personal wealth is linked to the fluctuation of share prices.
'We are not talking about the owners of blue chip companies, but the numerous founder-owners of enterprises in the Greater China region that have accumulated worth of US$150million to US$200million,' Mr Ho says, adding that these companies often have low liquidity which hampers their owners' chances of diversifying the scope of their investments.
He says having more funds to invest means that clients have the ability to increase the size of, or range of, shares in their portfolio. Cash extracted can be used to buy more shares or used for other investments to diversify their portfolio, and by investing in a broader range of asset classes investors can spread their exposure and reduce their risk.
'The underlying priority for structured derivative solutions is controlling the volatility and returns, while adding additional returns to a portfolio without adding a significant amount of risk,' says Mr Ho.
He says Julius Baer has tapped into the market by advising on solutions that allow business owners to maintain their existing shareholdings while unlocking assets to diversify their portfolio into other shares or investments. The range of solutions include borrowing and selling against the strength of the business owner's equity holding and capital market solutions such as derivatives and structured products.
Capital protected structures are often designed to allow investors to gain exposure to the performance of a risky asset, while ensuring they will recover at least 100 per cent of their investment.
'Liquidity offset against assets is becoming a big deal for high-net-worth individuals,' Mr Ho says. For example, a business owner whose main wealth is tied into his or her own company stock is able to pledge shares as collateral to obtain a loan which is then invested in a capital protected note linked to a diversified fund of funds.
The investment solution is sometimes offered as part of Julius Baer's open architecture platform through hedge fund specialist GAM's family of alternative investments.
'Put simply, the integrated solution offers diversification into liquidity and alternative investment classes while providing capital protection,' Mr Ho says.
Many traditional banks are not set up to meet that need. However, as a pure play wealth management firm, Julius Baer is not restrained to only being able to offer clients off-the-shelf-products. Instead, solutions are tailor made to suit the needs of each business owner.
Mr Ho says the key to providing this type of solution is closely linked to building a strong client relationship and having experienced professionals who can educate and work with the client to offer sound advice.
'We focus on understanding our clients' goals, how their businesses operate and how they are positioned in the industries in which they compete.'
Victor Lee, managing director for the Pacific Regional Group at JF Asset Management, says controlling risk is often a matter of controlling fear and greed.
'You will need to take on some risk as you put your money to work, but too much greed and the level of risk can grow considerably. However, on-the-other-hand, fear can result in making investment mistakes that involve risk,' Mr Lee says. The trick is to take on the right amount of risk for your age and financial circumstances, which will largely depend on risk appetite.
He says less traditional measure of risk is if an individual is up all night, terrified when the performance of a particular stock or asset class slips, then they are probably a bit overexposed in that area.
Like most financial professionals, Mr Lee advises that investors reduce risk by diversifying their assets. He says asset classes such as commodities, commodity futures, and hedge funds tend to move differently from stocks and bonds. Some financial planners say alternative investments can protect investors against risk in an environment where both stocks and bonds underperform.
Ray McGregor, Asia-Pacific regional co-head at Credit Suisse Solution Partners, a unit of Credit Suisse's Private Banking division, says in addition to a diversified portfolio and balanced investment strategy, there are other ways that wealthy entrepreneurs can reduce risk to protect their assets.
For example, high-net-worth individuals that have most of their wealth tied up in the family business in the form of their own shares could post their company shares as collateral to diversify their portfolio. However, this involves a reasonable degree of risk if the price of their company shares fall, as they may continue to lose money on those shares and may also be subject to margin calls.
Mr McGregor believes there are more effective strategies available to high-net-worth individuals for protecting their wealth against general market, sector downturns, or a decline in the value of their own company. These include purchasing index or sector put options that provide protection against events such as general market or sector downturns. They could also purchase a put over their individual stock holding, or more commonly, enter into a collar or variable forward holding.
'Collars and variable forwards provide the person with downside protection over their stock holding, but also allows them to borrow against the position in a manner which is not subject to margin calls,' says Mr McGregor, who heads a multi-disciplinary team of specialists offering customised solutions to complex client requirements.
He says from the range of diversity and risk mitigating solutions, collars and variable forwards are the most commonly utilised tools for providing protection to those heavily concentrated in one stock position.
'Collars and variable forwards offer a large degree of protection for a small or sometimes zero premium level,' Mr McGregor says, adding that the strategy also allows the stockholder to generate liquidity in a low risk and low cost manner (no risk of margin calls even should the share prices fall significantly). The strategy also enables the stock holder to continue to participate in upside gains in the share up to a cap level.
Mr McGregor says hedging is another option that can help to mitigate risk. 'Hedging strategies are specifically tailored to hedge the exact risk the client has, such as the level of protection, term, upside cap that can be customised to the stock holder's personal requirements, whereas index or general market hedges do not provide protection should the individual stock underperform compared to the rest of the market.'
General market hedges are exactly that - general hedges, and do not provide protection over the individual's specific holding. Additionally, general market hedges often do not allow the client to generate liquidity in a cost-effective way, as any loans could still be subject to margin calls.
Accumulated worth in US$ million of founder-owners of enterprises in the Greater China region: 200