THIS SUMMER’S MARKETructions surprised plenty of sophisticated financial institutions and dinged the reputations of powerful firms, from Goldman, Sachs & Co. on Wall Street to Renaissance Technologies among hedge funds. But a number of smaller financial planning firms, multifamily offices and registered investment advisers catering to the wealthy escaped the worst carnage and -- though nicked -- are sticking with their strategies. The secret: They do old-fashioned research, conduct face-to-face meetings with portfolio managers and construct such customized investments as funds of funds of funds, or F3s. Ironically, the smaller firms took this approach because they lacked the sophisticated infrastructure of wire houses or other brokerage firms.
Albert Zdenek, CEO of New Yorkbased Zdenek Financial Planning, says that analysts from his $200 million-in-assets firm rely on labor-intensive personal visits, references from clients and other managers, as well as proprietary analysis of documents. Zdenek invests his own or his partner’s money for at least six months before investing any client funds: “I’m the first in. And if I decide that the firm no longer wants to invest with a particular hedge fund, I’m the last to leave.”
Zdenek says that in some years his firm has visited 50 managers, investing in just one or two. Zdenek’s hedged strategies returned, on average, 2.06 percent in July and 3.04 percent in August, compared with 0.93 percent in July and 2.55 percent in August for the HFRX global hedge fund index.
The West Coast’s Coldstream Capital Management, with $1.2 billion in assets, has created a double layer of insulation against hedge fund blowups. The firm started investing in hedge funds after the technology bubble burst in 2000 and its clients -- many of them Microsoft Corp. employees -- craved the stability that long-short strategies could provide. Kevin Fitzwilson, a Coldstream managing director, says the firm formed two F3s -- one uses an absolute-return strategy, the other more directional strategies, such as global macro.
Elaine Heller, principal at Coldstream and general partner of the firm’s F3s, says the firm gets two levels of due diligence by using this approach, its own and that of the traditional funds of funds. “We vet funds of funds in the same way they identify underlying managers,” she says.
Fitzwilson adds that the firm is looking for managers that do not advertise their wares. “The best approach is word of mouth,” he says, adding that “the best managers don’t have to be marketing geniuses.”
Despite the extra level of fees, Coldstream takes the fund-of-funds approach rather than looking for individual hedge funds because it doesn’t have the personnel to conduct the huge number of searches that would be required. Although Coldstream’s fund-of-funds strategies were down 1 to 3 percent in August, Fitzwilson says, “this summer’s activity gave us further conviction that our approach is sound.” He says Coldstream in on track to meet its performance targets for 2007, which for absolute-return strategies are 6 to 10 percent net of fees.
GenSpring Family Offices, a $12 billion-in-assets Palm Beach, Floridabased affiliate of SunTrust Banks, takes a customized approach to hedge fund investing. Andrew Mehalko, CIO, says GenSpring often works with a manager to construct a strategy specifically for individual clients, such as a concentrated version of an existing investment or the long-only investment ideas in a long-short strategy. “We want to leverage what they’re really good at,” he says.
GenSpring also seeds strategies, invests in ideas alongside its managers and arranges with them to run separate accounts for its clients. “If we were just selling a product, we would get the fact sheet and be done,” Mehalko says. “But we’ve gone to see them, determined the culture of the firm and what gives them their edge.” He argues that larger firms can’t always get customized investments because some strategies can’t be scaled. “The manager gets long-term money, and we get a deeper relationship with existing talent.” In August, GenSpring’s alternative asset class composite returned 2.38 percent, versus its benchmark’s 2.55 percent return.
For hedge funds the benefit is good customers who will stick with them through tough times. “We can’t have fast money,” says David Atkinson, portfolio manager and general partner of $200 million-in-assets commodities firm Forza Capital Management in Bend, Oregon, who works with Zdenek. “Al understands this.”
