Sandalwood Securities Founder and President Martin Gross

This year, Sandalwood Securities celebrates its 35th year in business. Having originally started out as a fund of hedge funds, the Roseland, New Jersey-headquartered firm has since evolved into a family office manager which also runs an alternative investment platform open to external capital, including other family offices and investment advisors.

For its family office business, Sandalwood runs a well-diversified institutional portfolio spanning private equity, hedge funds, private credit, real estate and venture capital strategies.

In addition, the firm utilizes a variety of fund structures and investment approaches to manage money for its external clients. This includes a number of hedge fund portfolios, tailored specifically for managed accounts; it also manages special purpose vehicles focusing on private equity, real estate, venture capital and direct lending strategies, involving co-investment strategies with other family offices and institutional investors, often with longer lock-up times.

Such partnerships underpin much of Sandalwood’s approach to alternatives investing, the firm’s Founder and President Martin Gross told Alternatives Watch.

“As a family office-driven alternatives platform, we let our clients know what the family is doing, and then different clients can come in with us on a deal-by-deal basis, should they want to participate in this real estate fund, or that venture fund, or that private equity fund,” Gross said in a recent interview.

Paying dues

Turning to the firm’s investment philosophy, Gross explained how the firm – which has just under $1 billion in overall assets under management – does not attempt to time markets or predict interest rates. Instead, its strategy selection is built around a fundamental, bottom-up process, with opportunities assessed on a case-by-base and sector-by-sector basis.

It’s an approach that has served Sandalwood well over the past three-and-a-half decades, helping the firm navigate episodic market turmoil which sunk other managers. An industry veteran of more than 40 years, Gross had been a tax and corporate lawyer in investment bank and brokerage L.F. Rothschild, Unterberg, Towbin’s corporate finance division before starting his investment career in 1983, when he switched to tracking and evaluating individual fund managers’ performances on behalf of high-net- worth investors.

“To cut to the chase, we don’t make macro judgments,” Gross said of Sandalwood’s approach to strategy selection. “You can’t just be in a series of long/short equity hedge fund managers, and then suddenly make a decision that the next year is going to be all about event driven and redeem out of those long/short hedge funds. You can’t really jump around like that. Some people try to, but it’s very difficult to do. Instead, what you should be doing is picking managers that are capable of all of those different strategies.”

He explained: “We’ve paid the dues of being with many managers in order try to find the ones we really want to continue going with. We have managers who will be short equity, they’ll also be long equity, they’re the managers who could be in many different asset classes. They can make strategic changes as markets change.”

Individual intellect

Although allocators continue to pivot away from the traditional 60/40 portfolio mix, the decade-long market bull run following the 2008 crash has meant alpha generation has often been tricky for hedge funds and other alts managers in recent times.

But while many investors have been content to ride the beta wave amid the sustained stock market rally, Gross is steadfast in his belief in alternatives’ place in portfolios. What’s critical, he said, is to “get away from the macro view” – and instead find individual managers executing strategies which make money, even when markets are flat.

He said the key difference between alternatives and long-only investing is the individual, adding that an S&P 500 index fund will outperform 80-90% of individuals trying to pick stocks.

“The whole question of alternatives is really one about people,” he remarked. “It’s hard to outperform the S&P index fund on a long basis – statistically it hasn't happened for a very long time. So, you’re trying to find individuals, those people with incredibly special intellect, who use strategies that are not wedded to always being long. If you have someone that shorts stocks as well as going long, then you have the possibility for a much better risk-adjusted performance than long-only. We have managers that were up 8% when the market was down 18% because of that individual factor.”

Delving deeper, he continued: “While we know what happened yesterday, we don't know what’s going to happen tomorrow. We know that long-term returns from public equities are about 10%, but we also know there will be extreme events in markets, which, if you’re levered, can really hurt you very badly.”

Gross pointed out there have been over the last 100 years extended time frames where equities do not make money, and a few times where for 10 or more years where equities were flat.
“Alternatives are there to make money for you when markets are not. You need alternatives, in our opinion – that’s why institutions have allocations to them,” he added.

For certain investors like endowments and foundations, which spend 5% with a 2% inflation level, alternatives become critical to portfolio performance during flat markets, he noted.

For institutions with a 5% spending plan, it becomes troublesome with a 2% inflation factor that translates to losses of 7% per year. To make up that 7% just to stay flat over a 10-year period without any money returned from equities it means groups such as endowments or foundations struggle as its fair to assume that even their donors have less money if the stock market’s flat. According to Gross that’s why alternatives go into any serious portfolio.

Real estate: A key opportunity

Observing the evolving challenges and opportunities that make up the current investment landscape, Gross urged caution on direct corporate lending, noting the “huge amounts” of money entering the space. “We know they’re able to charge less, and we know the covenants are getting weaker, because we talk to the managers,” he said.

In contrast, real estate lending is a key opportunity which offers “some really great niches,” as alternative lending strategies continue to step into the funding space vacated by traditional investment bank financing. Here, many of Sandalwood’s strategies have notched 13% net returns, outflanking broader equity markets.

Specifically, traditional bank lenders have “simply walked away” from construction lending in plain vanilla multi-family housing, Gross noted, amid tightening capital requirements for investment banks. “We’re talking about lending to a very, very stable asset class to build them in tier 1 markets, with great developers, with a great manager.”

He continued: “Other than specialty funds in private equity or real estate, which are very different, I would say the best risk adjusted trade right now is in certain types of real estate lending - not corporate lending,” Gross observed.

“We’re seeing a lot of interest here, in lending funds in the low-to-mid teen return level. If I had to pick one thing to do in general in 2025, it would be real estate-related lending,” he concluded.