GenSpring Loses Arbitration Over Hedge Fund Recommendation

Feb 13 2013 | 11:02am ET

A Florida investor has won a $4.3 million arbitration award against GenSpring Family Offices, which allegedly sold him a portfolio of funds of hedge funds it claimed were as safe as bonds.

According to the complaint, GenSpring, which is owned by SunTrust Bank, told the investor he should put 30% of his $30 million portfolio into multi-strategy hedge funds instead of bonds. Such hedge funds had a "risk profile similar to bonds," GenSpring allegedly said.

But the complaint argues that GenSpring knew very little about the hedge funds, which we actually funds of funds. Indeed, the firm allegedly didn't even know what strategies the funds employed. And, of course, when the financial crisis struck, the funds lost a good deal while bonds rose.

"It is clear that GenSpring's statements were misleading and inaccurate," Ed Dovin, a lawyer for the investor, said. "Prior to the 2008 financial crisis, GenSpring represented the hedge funds as a 'substitute for bonds,' claiming that they had the same risk as bonds but with higher returns." In the aftermath of the crisis, GenSpring reclassified the hedge funds as "growth," rather than "defensive."

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