Q&A: GenSpring Banks On Independent Advice

Mar 28 2008 | 8:53am ET

As the number of ultra-high-net-worth families grows globally by at least 10% each year, so too does the business of managing their money. While banks have historically been at the forefront giving investment advice to these elite, family offices are quickly gaining popularity as a viable alternative.

FINalternatives recently spoke with Hugh Forward, senior portfolio strategist at GenSpring Family Offices, about his firm’s views on hedge funds and why he thinks GenSpring, with its focus on independent advice, unconflicted fee structure and first-generation wealth management, has turned it into one of the largest and most successful multi-family offices in the United States.

The firm, which recently opened an office in New York and expanded into the Phoenix area via the acquisition of Inlign Wealth Management, now works with over 600 families and has nearly $15 billion in assets under advisement. Its clients start with a net worth of $25 million and go up from there.

FINalternatives: What is GenSpring’s attitude toward hedge funds? Do you believe that all of your clients should have exposure to the asset class?

Forward: Our founder, Hap Perry, has always believed in hedge funds, so we grew up from the beginning with hedge funds as a major part of asset allocation within GenSpring. We never really tried to differentiate between hedge funds and long-only. It was always ‘where is the best place to put the money?’

In terms of actually using hedge funds, we are only going to use them if they add value on the short side. There are a number of very good long-only managers, so there is no reason to pay additional fees to someone who doesn’t add more value.

FINalternatives: What percentage of your clients invest in single-manager hedge funds? What about funds of hedge funds?

Forward: Most of our clients invest through fund of funds, though some of our larger clients invest directly in single-manager hedge funds. The biggest issue is minimums. A client may come in and even though he may have a $25 million account, the money may be in 10 different legal entities and we have to make sure that each legal entity is a qualified investor. That is really the biggest barrier to getting our investors into hedge funds.

FINalternatives: How many hedge funds do you look at each year? How do you select which managers make the cut? 
Forward: Between all of us, we look at close to 500 managers per year. However, even though we see that many funds, the odds of us adding new funds gets lower each year. We currently work with somewhere between 175 to 200 managers on the long-only, hedge fund and fund of funds side, but the majority of the money is concentrated with 50 managers.

We do manage some in-house fund of funds, but we don’t charge for them—they are just aggregation vehicles. We won’t do something in-house if someone else does something better.

FINalternatives: I read that GenSpring occasionally seeds new hedge funds. Can you tell us a bit about the seeding program?

Forward: I would say we are an early-stage investor, not a seeder. We do give money to startup hedge funds, but we don’t have any economics in the hedge funds, all the seeding we’ve done is through fund of funds. We are happy to put in $50 million, but we don’t ever want to be in a position where we can’t fire a manager, so we don’t have an economic interest [in the ownership of a fund] ourselves.

FINalternatives: What differentiates your firm from the private wealth management unit of a large bank?

Forward: All of our fees are paid by the client. We don’t get any kickbacks and we don’t charge for anything else we do [such as creating fund of fund investment vehicles]. The banks and brokerage houses have embedded fees in just about everything they do. If you want to know what someone does, just look at how they are paid.

FINalternatives: What makes a family office different from other investors?

Forward: The family office is terrific because you can go into just about any manager in the country, even if they are closed, and they’ll want to talk to you because they truly believe that family offices offer a different kind of investor. We’re longer-term money and we tend to add more value in terms of the investment process. Many of our clients are first generation wealth [having made it by selling their own businesses], so they have a tremendous amount of knowledge in certain sectors.

What we don’t want to be is just another investor with a large hedge fund. We want to find the best mid-sized hedge fund and then grow up with them. We will work very closely with them, even when they are going through a rough patch.

FINalternatives: What strategies do you currently favor? Are there any strategies that you are advising your clients to avoid for the foreseeable future, such as the credit markets?

Forward: You always want to be in the least efficient market, that’s where you make the most amount of money. We are dyed in the wool value investors, always will be, always have been. As for credit, we are looking at how to do it, but we aren’t going to grab our favorite steed and charge into battle, we are going to wait for things to settle down. 

Right now we like long/short. It’s the usual. We’ve fought this unending battle with Japan hoping it will go up and it just keeps going down, but it’s just so cheap…We like Asia because we think the axis of power will change because it is such a dominant growth economy. We are also looking toward a new distressed cycle.

The biggest thing right now is to avoid leverage. We always try to avoid strategies that rely on leverage to produce returns.

FINalternatives: How has the recent market volatility, as well as the problems in the credit and housing markets, affected your investing strategy?

Forward: Obviously, January wasn’t a great time for anyone, but we were pretty much in line with the market and we didn’t have any huge problems because we don’t do big leverage trades.

We are still getting a tremendous amount of money through the front door each month because we’ve started to move beyond the Sun Trust [our parent] brand, and as people begin to learn who we are and what we do, they find it very, very attractive, especially having the New York office now.

By Deirdre Brennan

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