We talk to the founder of a 34-year-old US family office and investment house about its approach toward credit, fund-based lending, VC and other areas.

A veteran of the US investments sector has been building a business designed to handle the vagaries of financial weather. The focus is on steady returns at levels of volatility that won't frighten investors.

At New Jersey-based Sandalwood Securities, a family office that also runs money for external clients (total AuM around $800 million), asset class diversity is name of the game. The firm, established in 1990 as a fund of hedge funds business, has 11 staff.

About half of the family office assets are in publicly traded equity and debt, as well as hedge funds, with the balance in the other alternative areas. For all external investment partners, however, Sandalwood is solely focused on alternative investments. 

“Sandalwood’s investment philosophy can be best described as a bottom-up, fundamental value investment approach that does not use leverage as a material component of its investment approach. This philosophy is employed across their entire diversified investment portfolio of alternatives,” Martin Gross, founder, told Family Wealth Report in a recent call.

Sandalwood intends to build methodically. “This race is not a sprint, but a long-term challenge,” Gross said. 

The firm illustrates the following target returns for its asset classes it employs: Hedge funds (low teens); real estate (direct) (mid-teens); real estate funds (mid-teens); lending (9-12 per cent for performing loans; 15 epr cent + for defaulted loans); private equity (mid-teens); venture capital (20 per cent +); long equities (S&P + 2-3 per cent), and cash/bonds (market).

Polymath
Gross, who is enthusiastic about history, law, foreign affairs and a published writer, is used to thinking about the long haul. His career in investment management began in 1983 when he tracked and evaluated the performance of investment managers on behalf of high net worth individuals. Before he set Sandalwood up, he practiced tax and corporate law in New York City, working in the corporate finance division of LF Rothschild, Unterberg, and Towbin. A member of the New Jersey and New York Bars, he has written numerous articles for publications such as the Wall Street Journal, and is a frequent figure on the investment sector lecture circuit.

And Gross’s activities go far beyond investment, touching on education and foreign affairs. He is a former member of the board of trustees of Brandeis University and the board of overseers for the Brandeis International Business School, and served as co-chairman of the university’s investment committee. He is a chairman emeritus of the Washington Institute for Near East Policy, a member of The Council on Foreign Relations, and he serves on the board of trustees of the New York Historical Society. Gross served on the committee on Research Libraries of the New York Public Library where he established the Martin J Gross Collection of Voltaire, one of the world’s most important collections of the 18th century French writer’s works, as well as on the Dean’s Council of New York University Law School.

Changes
After founding Sandalwood, Gross gradually turned it into a family office, creating its own investment portfolio. The firm holds investments in public equity and debt, hedge funds, various lending strategies, biotech, real estate, venture capital, and private equity.

“When it comes to hedge funds, we tend to favor various credit strategies and activist equity, and we have a modest biotech allocation as well. It’s interesting to note that institutions continue to have large allocations to hedge funds,” Gross continued. “If equities are offering 10 per cent over long time frames, and hedge funds can deliver that but with far less volatility, then a portfolio of carefully selected hedge funds has a role to play in any portfolio.”

“Historically, public equities have outperformed most hedge funds when the return for a given period exceeds the 10 per cent level,” he said. 

And that comment says a lot about Gross’s broader approach – ensuring that investors are fully compensated for the risk they take, and where possible, get a solid return without too many bumps in the road.  

Funds becoming banks?
The rise of private credit as an asset class is a well-established trend. Gross noted that some hedge funds traditionally trading public equity and debt are now entering lending strategies, filling spaces left by banks that either don’t, or can’t, lend in the ways of old. 

“One needs to assess whether those additional strategies are within the expertise of the manager establishing a presence in the strategy. One major trend now is that many funds are being formed to take the place of banks,” he said. “The funds lend to both corporations and owners of real estate. If these funds can generate greater than the long-term returns from equities with far less volatility and risk, then they are a good substitute for public equities, especially for tax exempt investors. 

“Other credit-oriented hedge funds are creating drawdown funds with a five-year time horizon to trade stressed and distressed debt. These funds have a mid-teen net return target,” Gross said. 

Gross sees the credit space as consisting of hedge funds trading credit, lending funds and drawdown funds. Some hedge funds are buying loans that trade at a net return. Some funds are also buying tranches of private credit debt, he said. 

Certain parts of the alternative investments space have been beaten up after two years of rising interest rates, ending a 12-year stretch of ultra-low rates. Last year’s demise of Silicon Valley Bank, Signature Bank and First Republic were the most visible examples of pain. As reported here, there are still worries that not all is well, such as in commercial real estate.

Sandalwood is currently taking a “wait and see” approach to venture capital and private equity investments, Gross said.  

Another area that Sandalwood is looking at is biotech, because there has been a crash in valuations, creating potentially attractive entry points.