SMAs That Act Like Alternatives
This post is a summary of a session from the FRA’s 8th Annual Managed Accounts Summit.
While many money managers have been switching client assets into alternatives in their search for better returns, David M. Spungen, Chief Executive Officer of Hillview Capital Advisors, LLC, believes this is a bad idea. For a taxable individual, alternative investments, particularly hedge funds are extremely tax inefficient. They’re also expensive in terms of fee structures versus separately managed accounts.
According to David, Hillview does their own research and tries to locate managers that operate like alternative investments. They must be in separate accounts, with generally very workable minimums and reasonable, flat fees.
For example, Winward Investments (which was purchased in August 2010 by Charles Schwab for $150mm) has been successful in attracting assets from individuals, RIAs and large institutions, David revealed. When Hillview found them back in 2003 they were managing only $200mm. By the time they were acquired their AUM was $3.9 billion.
What Winward has done is similar to what most fund of hedge funds are pitching, David said. Good risk adjusted returns, with much less volatility, and less exposure to a significant decline in equity markets. They have daily liquidity, a fair amount of tax efficiency, flat fees and total transparency. Winward runs essentially a global, multi-asset class strategy. They were also one of the early adopters of ETFs, which, David suggested, is one of the reasons that Schwab bought them. (for more info, click here to read an interview with Stephen Cucchiaro, President, Windward Investment Management)
In 2008, Hillview started using a strategy that invests in both fixed income and closed-end funds on a hedge basis. It’s very tax-efficient since the fixed income side is invested munis.
David explained another reason for their tax-efficiency. If closed-end funds go to significant discounts to NAV, a lot of them overpay their dividends. They may go to a managed distribution policy and decide to pay 7% a year, for example. Hillview may earn 3% in dividends and another 2% in realized capital gains, which is basically just returned capital. So a lot of the return they get winds up being returned capital, which is very tax efficient, he explained.