I would like to introduce an interesting article by Michael W. Sonnenfeldt, founder of TIGER 21 and operator of his own family office, on measuring the investment performance of family offices.
In the article, Sonnenfeldt argues that the ability to build substantial wealth is distinct from the ability to manage that wealth properly through a family office. Many successful entrepreneurs know the current value of their assets, but they have not measured how much they actually earned while building that wealth or whether the results justified the risks they took and the fees they paid. Even after establishing a family office, attention tends to focus on asset balances, asset allocation, relationships with prominent managers, and access to exclusive investment opportunities, while verification of investment performance itself is often deferred. This is the central issue raised in the article.
Contents
Measuring Family Office Performance
Because annual investment performance fluctuates significantly with market conditions, capability cannot be judged from figures at a single point in time. Sonnenfeldt nevertheless states that family office investment portfolios often generate long-term annualized returns of only about 6% to 7%. He compares the outcome of a 6% annual return, under which one dollar grows to approximately $5.74 over 30 years, with the approximately $17.50 it would become if the long-term return on the U.S. equity market were assumed to be about 10%. His argument is that performance measurement should force family offices to confront the fact that, despite employing numerous staff members and using investment committees, consultants, external managers, and private funds, they often end up underperforming a low-cost market index.
However, the business activities that created the wealth and the subsequent investment management of that wealth have different objectives. Entrepreneurs build wealth by concentrating capital and effort in businesses they understand deeply and over which they exercise a degree of control, while assuming substantial risk. By contrast, family offices are generally expected to provide diversification, risk management, and capital preservation. Sonnenfeldt states that he compounded his capital at an annual rate of 21.7% over 42 years of business activity. He clearly distinguishes this as the result of concentrating on businesses he created and managed, not as a portfolio return that a family office should target.
In light of this distinction, he argues that a family office should first determine what its investment function exists to achieve. The key to addressing the issue is not the introduction of a new system but the selection of appropriate performance metrics. He warns that, without performance measurement, a family office may fail to detect that a complex investment structure and high fees are gradually eroding wealth, and that the impact may be amplified across generations through compounding.
The first practical discipline he identifies is to measure performance over multiple periods—short, medium, and long term—and by level of liquidity and risk. Classifying assets solely by conventional asset class, such as equities, bonds, private equity, real estate, and cash, is insufficient. As a separate axis, he proposes four categories: (1) assets that can be converted to cash immediately; (2) assets that can be converted to cash within 90 to 360 days if a discount is accepted; (3) illiquid, cash-flow-generating assets, such as operating companies; and (4) assets intended to achieve substantial growth, such as venture investments, startups, and development projects. His view is that overlaying these two classification systems reveals concentrations and weaknesses that conventional investment reports may obscure.
The second discipline is to recognize entrepreneurship and investing as different skill sets. An entrepreneur who built a successful business may have had a competitive advantage in that business, but does not necessarily possess the same advantage in the global capital markets entered after the business is sold. Sonnenfeldt therefore argues that family offices should not assume that the high returns achieved during the company’s founding phase will continue. Instead, where necessary, they should appoint people with sophisticated investment capabilities and adopt objectives and evaluation methods suited to asset administration.
The third discipline is to determine the family office’s purpose and governance policies before discussing investment strategy. Specifically, the family should consider whether future generations will continue to hold the assets collectively or manage them independently; under what conditions financial assets and philanthropic assets should be pooled or separated; and how spouses and heirs should participate in governance. Sonnenfeldt believes that these governance and structural decisions, more than the selection of investment products, determine the success or failure of a family office.
The fourth discipline is to continue measuring what truly matters. His conclusion is that recording returns across multiple dimensions—time horizon, asset allocation, risk, and liquidity—reveals both weaknesses and repeatable strengths. It also allows more evidence-based decisions about the sale of assets, staffing levels, and whether establishing a family office is itself justified.
What We Should Take Away from Michael W. Sonnenfeldt’s Message
Regarding the average annualized return of 6% to 7%, the article does not identify a specific study, sample size, measurement period, or whether the figures are before or after fees and taxes. The author’s own annualized return of 21.7% is likewise presented as a figure based on his calculation. Nevertheless, the central proposition—that evaluation criteria should be defined according to the objective and measurement should continue over time—is important.
The first question in evaluating a family office’s investment management should not be the target rate of return. It should be the investment objective: why the assets are held, when they may be needed, and how much may be used. Investment performance cannot be evaluated properly if the timing and purpose of the family’s funding needs—including living expenses, tax payments, additional capital contributions to businesses, inheritances and gifts, and philanthropy—remain unclear.
For example, funds needed in the near future require stability of principal and ease of conversion to cash rather than higher returns. By contrast, long-term capital that is not expected to be used for the foreseeable future can accept short-term price fluctuations while considering growth opportunities that include illiquid assets. Evaluating both pools against a single rate of return may impose excessive risk on short-term funds and excessive conservatism on long-term funds.
In many cases, an excessive pursuit of high yields results in an over-allocation to high-risk products. In other cases, insufficient diversification across asset characteristics prevents efficient investment management.
It is therefore important to divide the overall asset base into liquidity buckets—at a minimum, “funds available at any time,” “funds that may be used within several years,” and “funds that can be held for the long term”—and to define the objective, investment horizon, acceptable loss, and benchmark for each bucket.
Evaluation should consider not only headline returns but also results after fees and taxes, price volatility and maximum loss, whether funding needs were met, and whether exposure to a particular business, security, or manager is excessive.
Moreover, the performance of a family office cannot be measured by investment returns alone. Over the long term, it is equally important to assess whether the family has a decision-making framework it can accept, whether necessary information is shared at an appropriate frequency, whether policies can be maintained and reviewed after a generational transition, and whether administrative, tax, and legal risks are being managed.
The family should agree on investment objectives and liquidity buckets and document the evaluation criteria appropriate to each bucket. It should then periodically review both actual performance and the underlying assumptions. Following this sequence allows the family to evaluate investment management in line with its own objectives without being swayed by market conditions or a single year’s return.
Reference
Michael W. Sonnenfeldt, “Is a Poorly Performing Family Office Eroding Your Family Fortune? You Won’t Know if You Refuse to Measure Its Returns,” Kiplinger, published August 21, 2026.
This article is intended solely to provide general information and does not constitute investment, tax, or legal advice.
